University of Fort Hare Governance and Auditing 211E Ethics Notes

NKUHLU DEPARTMENT OF ACCOUNTING GOVERNANCE AND AUDITING 211E ETHICS Unit 1 – Key Concepts in Business and Professional Ethics Unit 2 – Classical Ethical Theories Unit 3 – Ethical Decision Making Unit 4 – Applying the...

NKUHLU DEPARTMENT OF ACCOUNTING GOVERNANCE AND AUDITING 211E ETHICS Unit 1 – Key Concepts in Business and Professional Ethics Unit 2 – Classical Ethical Theories Unit 3 – Ethical Decision Making Unit 4 – Applying the 5 Tenets of Ethical Decision Making Unit 5 – The Modern Corporation and its Moral Obligations Unit 6 – Managing Ethics Unit 7 – Accountants and Auditors as Professionals Ethics 1 Unit 1 KEY CONCEPTS IN BUSINESS AND PROFESSIONAL ETHICS After studying this topic you should be able to: Define the concepts of ethics, business ethics and professional ethics; Outcomes for Identify the relationship between ethics and values; this unit Distinguish between personal and social ethical dilemmas; Discern the three levels at which ethics in economic activity is being studied and identify the core issues that are studied at each of these levels; Indicate why ethics needs to be addressed on both the personal and organisational levels; Make a clear distinction between morality and legality; and Demonstrate why professionals need both professional standards and professional virtues. Overview of the Ethics will be explored through the three core concepts: the “self”, the study topic “good” and “the other”. Ethical behaviour is characterized by the fact that it is unselfish and balances what is good for oneself with what is good for others. The relationship between ethics and values will also be explored. We will introduce concepts such as legality and moral dilemmas. The difference between personal and organizational ethics will be highlighted. The relationship between personal, business and professional ethics will also be explored. By referring to the typical features of professions, it will be shown that ethical standards and virtues count among the distinguishing features of the accounting and auditing profession. Course material The following course material has been provided to you: Ethics for Accountants and Auditors (4th Edition) – Chapter 2 Lecture notes Key concepts in business and professional ethics – video Discussion board questions (Ethics week 1) Manner of This topic can be assessed through the application questions though assessment the following assessment types: Ethics quiz Integrated assignment Ethics test (written) Ethics 2  1) Introduction In order to make to be able to identify, analyze and assess the ethical dimensions of any situation we need to have a proper understanding of the key concepts in ethics. We need to make important distinctions and clarifications to the relationships between ethics and the related concepts and values, virtues, moral dilemma and the law. 2) Ethics and morality The terms ethics and morality are often used interchangeably. When we consider what is unacceptable or irresponsible behaviour we usually refer to such behaviour as unethical or immoral. What is unethical is immoral and what is immoral is unethical. Ethics and morality refer to the character and manners of a person Character: What kind of person someone is Manner: How the person interacts with others Character and manner show that ethics is about self and our interactions with others. The quality of our interactions between ourself and others needs to be considered. This is the third essential element of ethics – the concept of good. Using these three concepts good, self and others we can define an ethical action as an action that is good not only for oneself but also good for others. Good ETHICS Self Others Ethics 3  3) Ethics and values Values are our convictions (beliefs) about what is good, right or desirable. Our values provide context and guide us in determining what is good in the definition of ethics. Example: If we believe/value freedom, human dignity, equality or honesty as being good, we use these standards to determine if an action is not only good for us but also for others. If an action promotes only my freedom but compromises the freedom of another, it cannot be considered good, and therefore would be an unethical action. People do not share the same value and we often find between ourselves and within groups there are disagreements. Disagreements can be in the form of: - What is good; and - What is more important. Differences in people’s values are due to a variety of factors, such as culture, religion, climate, social and economic status, personal experiences, age, genders, etc. The difference in value systems can therefore result in differences in ethical judgements. Just as an individual has personal values, an organization will have organizational values. There are three difference values within an organization: Strategic values: Usually reflect the vision and mission of the organization. Work values: Priorities that employees should adhere to in their jobs. Ethical values: Commitment to good interactions with stakeholders, which includes honestly, fairness, respect. 4) Right, wrong and dilemmas Disputes over what is right and wrong will result in difficult situations and can result in questions over whether or not the action is ethical or not. An ethical dilemma occurs when one is forced to choose between two or more options that are all to some extent wrong or having to choose between competing good values. Dilemmas can either be interpersonal or intrapersonal. An interpersonal dilemma is a social dilemma that occurs between groups of people. An intrapersonal dilemma is a personal dilemma that occurs within oneself. Most ethical dilemmas can be resolved though compromises that are referred to as “creative middle way solutions”, which is where conflicting parties reach a compromise to accommodate the ethical concerns of both parties. It is necessary that both parties are willing to discuss the dilemma and arrive at a Ethics 4  solution that will accommodate the moral concerns of both parties. 5) Ethics and the law Is there a difference between ethics and the law? Can an action be ethical but not legal? Can an action be legal but not ethical? There are distinct similarities between ethics and the law, but there are also significant differences. Both intend to determine what is right. Law: Establishes what is right through the public and political process to ensure that all people abide by the law. Ethics: Values determines what is right. Examples: 1) An entity publishing its financial statements accurately. 2) Exceeding the speed limit to ensure a seriously injured person gets to hospital. 3) Dumping toxic waste in a river where there is no law preventing such actions. The law and ethics are not always aligned. 6) Business ethics Business ethics focusses on what is good and right in economic activity. Business transactions consist of the exchanging of a product/service for money. If this exchange in fair to both parties the interests of both parties is served, and the transaction can also be considered ethical. Consider: The exchange of an inferior/damaged product. The charging of an unfair price to customers. The buyer not compensating the seller. When considering business ethics we need to consider the moral evaluation on three levels: - The economic systems level (macro-economic) - The organizational level (meso-economic level) - The intra-organisational level (micro-economic level) 1) Macro-economic ethics Refers to the policy framework or economic system within which economic exchange takes place. It is determined at a national level by the political power of the state. When exchange is international it is determined by multilateral international trade agreements. Ethics 5  Business ethics at a macro-economic level evaluates economic systems and policies to determine if they are fair and just. 2) Meso-economic ethics Refer to business organisations, such as corporations and firms and their relationship to the rest of society. Businesses have an impact on stakeholders, including society, customers and suppliers. The impact can be beneficial or detrimental. Business ethics at a meso-economic level, evaluates the ethical impact that business has on society. 3) Micro-economic ethics Refers to economic activity within business organisations. Focuses on the moral implications of business practices, policies, behaviours and decisions within business. Businesses have an impact on the people who work from them. Employees may be faced with moral problems which arise at work when their personal and professional values differ. Other factors could be discrimination, harassment, physical and mental health concerns. Cultures and policies or systems within the workplace may also break trust between employees in the organization. 7) Personal and organizational ethics Business ethics considers not only personal ethics but also organizational ethics. Consider the metaphor of the apples and barrels. Unethical behaviour in organisations (barrels) is often associated with unethical individuals (individuals). The unethical individuals are considered morally corrupt and it is suggested that the solution to the unethical behaviour in business is to remove the unethical individuals. Individuals are affected by their settings in the same way that apples are affected by the barrels in which they are kept. If the apple is placed in a dirty, unhygienic barrel it will not last as long as an apple in a clean, hygienic barrel. This principle applies to organisations as well. The setting within which an individual works can have either a good or bad effect on the individual’s moral character. An unethical individual can affect the whole organization. A but an unethical individual can also be restrained if unethical behaviour is not tolerated within the organization. Ethics 6  This highlights the importance that ethical behaviour must always be considered at both an individual and an organizational level. 8) Professional ethics Professional ethics refers to specific groups within society that agree to adhere to specified self-imposed ethical standards. The self-imposed ethical standards are usually in the form of a professional code of conduct and are in place to ensure all members within the profession act in accordance with the spirit and purpose of the profession for the benefit of the clients and community they serve. A professional accountant must consider personal ethics, organizational ethics and professional ethics, and ideally these three sets of ethics should be aligned. 9) Professional virtues Virtues are character traits which pre-dispose one to do the right thing and are developed over time. As part of training to become a professional an individual will be required to develop professional virtues that are aligned with those of the profession as a whole. The most important virtues of a professional accountant are integrity, professional competence and objectivity. 10) Conclusion You have been introduced to the core concepts of ethics, business ethics and professional ethics. You need to understand the key concepts from chapter in order to be able to apply them within the remaining course material related to Ethics. Ethics 7 Unit 2 CLASSICAL ETHICAL THEORIES After studying this topic you should be able to: Explain what virtues ethics entails. Identify the distinguishing features of deontological ethics. Outcomes for Discern the approach taken by utilitarian ethics. this unit Demonstrate the relevance of ethical theories for accounting and auditing. Overview of the A number of ethical theories have been developed which provide study topic guidance in judging whether or not an action or decision is ethical or not. Three theories will be discussed – 1) Virtues theory 2) Deontological theory 3) Utilitarian theory Course material The following course material has been provided to you: Ethics for Accountants and Auditors (4th Edition) – Chapter 4 Lecture notes Classical Ethical Theories – video Discussion board questions (Ethics week 1) Manner of This topic can be assessed through the application questions though assessment the following assessment types: Ethics quiz Integrated assignment Ethics test (written) Ethics 8  1) Introduction In order to make a judgement as to whether an action is ethical or not, a standard or criterion against which to measure the action is required. Ethical theories provide the standard for measuring actions against. Ethical theories therefore assist individuals in deciding if an action is ethical or not and provide reasons as to why we consider such actions ethical or not. The three influential theories discussed during this chapter are: - Virtues theory (Aristotle) - Deontological (Kant) - Utilitarian (Mill) 2) Virtues theory The focus of the virtues theory is the assumption that being moral is both necessary and vital for human beings. The theory revolves around an individual’s desire to reach their goal, which for humans is the greatest happiness. To achieve happiness requires that we live in a society that is characterized by justice, to have friends that are good and support you, you have adequate material resources and that you develop and cultivate your human potential. Aristotle believed morality starts with self and relies on the character of the individual. Morality requires people of good character. Our character is developed through our virtues, and our character traits are what allow us to reach our happiness. According to Aristotle virtues are the activity of the soul and imply a rational principle. We are inclined to act in a certain way due to our natural dispositions, which are controlled by our rational thoughts. There is a difference between rational thoughts and natural instincts. Rational thoughts can be taught and controlled whereas a natural instinct is a manner in which we react without thinking or without hesitation. Aristotle developed the ‘mean´ to indicate what is implied by rationally controlled dispositions. Our natural dispositions generally tend to be either excessive or defective. The mean is the mid-point of the two and can be achieved though rational control. Acting a virtuous way provides a sense of well-being a joy, which will provide pleasure, which will result in happiness. If we continue to behave in a virtuous manner it will become a habit and will be part of your character. Ethics 9  3) Deontological ethics The theory insists that moral actions require conformity to rationally founded moral principles. The theory focuses on the quality of our actions. Kant believed that to achieve constant moral behaviour that good will was needed. Good will is the will that obeys the universal moral law and respects that evident moral authority of this universal law and obeys it from a sense of duty. Kant developed the law of “categorical imperative” against which our actions should be measured. - An action can only be considered ethical if one is willing to allow all other people to perform the same action. Two principles are used as a guide for the categorical imperative. Principle of universalisability We should be willing to make the principle of our proposed action into law that will be followed by all people. Principle of reversibility We should be willing to live in a world where everyone else behaves in accordance with universal law. Example: John Smith is a professional accountant who has discovered that Andrew Jones has been manipulating the sales figures on a monthly basis in order to meet the monthly targets set by the company as this affects his commission earned. John Smith must decide whether the actions of Andrew Jones are ethical or not and whether or not he would report the matter. In applying the principle of universalizability, John Smith would need to consider what the world would be like if all monthly sales figures could be manipulated in order to meet targets. In considering the principle of reversibility, John Smith would have to ask himself if he would be happy to live in a world where manipulating sales figures as a standard practice applied by everyone, which would result in no monthly figures being able to be trusted as true. Based on the two principles, considering the morality of the actions, we should conclude that John Smith would decide that the actions of Andrew Jones are not ethical, and he would report the matter. Kant’s categorical imperative translates into three practical imperatives. The first practical imperative: Our moral actions should not be guided by our own inclinations but by guided by our sense of duty to the universal moral law. We should be concerned as to whether the principle of our actions might be made into universal law. Ethics 10  The second practical imperative: Our actions should not be for the sake of our own goals but for the sake of an objective goal that applies to everyone. Kant believed that the objective goal was that of dignity for all human beings. The third practical imperative: Kant believed that the categorical imperative was not something foreign/strange to us, but rather something with which we can all identify. There is a moral rule that guides all our moral decisions/actions and we need to respect this rule and act on it from a sense of duty. 4) Utilitarian ethics This theory claims that the morality of our actions should be judged by their consequences. Mill believed that actions are good when the contribute towards achieving the ultimate goal of happiness. Greatest happiness principle – Actions should be considered good when they results in the happiness of the majority of those affected by the specific action. Simply put, when faced with a moral issue, we should calculate which of our alternatives will result in the greatest amount of happiness for the greatest number of people. Mill’s theory was widely criticized however, he responded to the critics: Criticism Explanation Response The theory is Suggests that human beings have Mill argues that human beings have both degrading to humans only one goal in life which is to attain bodily and mental pleasure and more pleasure (happiness) importance is placed on mental pleasures. Happiness cannot be Critics list a number of noble people Mill suggests that they have sacrificed the rational purpose of who sacrifice their own happiness in their own happiness for the sake of life order to do good. happiness for a greater number of people. Utilitarianism is It is impossible to always act for the Our actions only affect a few individuals unattainable general happiness of society who need to be considered. Utilitarianism is self- The principle will be abused in order Mill argues that abuse of the theory is serving to service the interests of the person incompatible with the theory of greater making the decision good. The theory is too time- It would take too much time to apply Mill argues that when confronted with consuming the theory to each moral decision. ethical issues we know beforehand if it is morally right or wrong so it would not be time consuming Ethics 11  5) Conclusion The theories discussed are used as a basis to determine whether a proposed course of action can be considered ethical or not. They emphasize that only people with decent moral character can be expected to do good, that there should be certain objective standards that should guide us in making moral decisions and that the consequences of our actions should be taken into consideration in our ethical decision making. Ethics 12 Unit 3 ETHICAL DECISION MAKING After studying this topic you should be able to: Understand ethical decision making and its impact on shareholders Outcomes for Understand the definition of ethical decision making this unit Understand the common sources of ethical decision making and their strengths and weaknesses Understand the difference between an ethical problem and an ethical dilemma Understand how the five normative ethical theories relate to ethical decision making Develop the capability to use the Five Tenets of ethical decision making to make better ethical decisions Overview of the Ethical decision-making and how to evaluate decisions to determine study topic if they are ethical or not will be addressed in this chapter. The concepts of ethical decisions and ethical dilemmas will be discussed. An understanding of how to evaluate decisions using the Five Tenets of ethical decision making will develop. Course material The following course material has been provided to you: Ethics for Accountants and Auditors (4th Edition) – Chapter 5 Lecture notes Ethical Decision Making – video Discussion board questions (Ethics week 1) Manner of This topic can be assessed through the application questions though assessment the following assessment types: Ethics quiz Integrated assignment Ethics test (written) Ethics 13  1) Introduction Decision making is a complex and engaging process and all of our decisions have implications and consequences. Within business, decisions affect numerous stakeholders and therefore when making good business decisions we need to take into consideration the best interest of all stakeholders, as this could be vitally important for the long-term sustainability of the business. 2) What is an ethical decision An ethical decision can be considered one that results in trust, demonstrates concern for others and upholds the values of responsibility, fairness and empathy for individuals and groups. Essentially an ethical decision is one which results in an outcome that is good for self and others. An unethical decision is one which favours self over others. In considering what an ethical decision is we need to consider how do we define what is good. Defining the good Universal ethical principles are ethical principles that most cultures agree on. The golden rule is the principle of treating others as one would like to be treated. However consideration needs to be given to the fact that good for self, might not necessarily be good for others. The platinum rule is the principle of treating other as they want to be treated. Common ethical standards include: - Religion - Laws and regulations - Individuals or group norms and value - Rules and codes of conduct Each of the common ethical standards has weaknesses which need to be considered when using them as a basis for measure a decision against. 3) What source of ethical standards should we use? In determining what ethical standard we should use to evaluate a situation we need to understand the two board categories of ethical challenges we can be faced with: a) Making an ethical decision and b) Facing an ethical dilemma Making an ethical decision Unambiguous decisions are ethical decisions where there is a clear distinction between right and Ethics 14  The challenge when making an ethical decision is to make the right choice or decision. This can occur when we do not know right from wrong, if we are being pressured by others, when we do not feel responsible for the decision or when there is little or no personal cost attached to making a decision. Resolving ethical dilemmas An ethical dilemma is a situation where we are faced by two or more choices, all of which may lead to unethical or less desirable outcomes. The outcome is considered unethical as it can often do harm no matter what course of action is taken, which results in no clear distinction between right or wrong choices. Refer to page 69 of Ethics for Accountants and Auditors (4th Edition) for a summary of ethical challenges and dilemmas. With respect the ethical dilemmas we need to consider options that will do the least harm to the fewest people or which results in the least amount of negative impact. We should always evaluate our decisions for ethical challenges whether they are unambiguous or result in a dilemma. We can use the Five Tenets of ethical decision making as an evaluation tool. There are 5 primary theoretical perspectives that can be used to make better ethical decisions and to assist in dealing more effectively with ethical dilemmas. 1. The utilitarian approach 2. The deontological approach 3. The fairness and justice approach 4. The common good approach 5. The virtue approach 1 The Utilitarian approach Uses the consequential approach to ethics – the possible outcomes of a decision or action are very important in determining if the decision or action should be taken. The principle is to take the course of action that will result in the greatest benefit to the greatest number of people. Ideally everyone should benefit from the decision. TENET 1 Ask yourself, who will benefit and who will be harmed? Can we make a decision that harms on one? If not, can I make a decision that will result in the least harm to the fewest number of people and the most good for the greatest number of people? 2 The deontological approach Absolutism argues that we should do what is right because it is the right thing to do Ethics 15  and not for some other reason or outcome. We should not consider the possible consequences of the decision as a justification. The categorical imperative was developed as a logic test of ethical decision making. In using the categorical imperative two primary decision making rules need to be applied – universalizability and reversibility. T TENET 2 Ask yourself, if I make a decision, or take a course of action can the decision or action be made into universal law that applies to everyone? Am I willing to have the decision or action done unto me? Which decision f or action protects the rights of everyone? 3 The fairness and justice approach Giving each person what he or she deserves or giving each person their due. The approach is all about fairness, however the weakness of this approach is in determining what fairness is. Should we apply different rules to different people yet still ensure that they are treated fairly and equitably. TENET 3 Ask yourself, if I make a decision, or take a course of action, is the decision or action fair and equitable to everyone involved? If not, what is the fairness alternative? If one group of person gains priority, can this be justified? 4 The common good approach This approach asks whether our actions or decisions are in the best interest of ourselves and society as a whole. TENET 4 Ask yourself, if I make a decision, or take a course of action, is the decision or action furthering the common good? Does the decision or action serve my community as a whole? If I should publish my decision or action in a public forum, will people in my community support my decision or action? 5 The virtue approach That which is morally right is something that helps us and others reach our purpose and to do what is mutually beneficial for everyone. We develop a virtuous character by practicing good habits. The virtues approach is very personal and is about an individuals character. TENET 5 Ask yourself, if I make a decision, or take a course of action, does the decision or action make me feel like the person I am meant to be? Does the decision or action help me to meet my purpose or potential? Do I feel good about my decision or action, or have I acted deficiently or in Ethics excess? 16  4) Using the Five Tenets as a framework for making and evaluating ethical decisions When faced with an ethical choice or dilemma one must ask themselves the key questions of the Five Tenets. The perspective of others is also important when considering whether a decision is an ethical one. 5) Conclusion The framework for making ethical decisions should be utilized for working through challenging ethical decisions. The framework should be used to reduce or eliminate ethical problems and dilemmas. Ethics 17 Unit 4 APPLYING THE FIVE TENETS OF ETHICAL DECISION MAKING After studying this topic you should be able to: Understand ethical issues in the context of real-life situations Use and apply the Five Tenets to real-life case studies in Outcomes order to evaluate decisions or courses of action for the forthis unit (un)ethical impact. Use the Five Tenets to make better ethical decisions. Overview of the In this chapter we will review a practical, real-life ethical situation and study topic will apply the Five Tenets to the decisions made and actions taken. We will evaluate whether or not the Tenets could have assisted in the situation. Course material The following course material has been provided to you: Ethics for Accountants and Auditors (4th Edition) – Chapter 1,5 and chapter 6 Lecture notes Applying the Five Tenets of Ethical Decision Making – video Discussion board questions (Ethics week 1) Manner of This topic can be assessed through the application questions though assessment the following assessment types: Ethics quiz Integrated assignment Ethics test (written) Ethics 18  1) Introduction We will be applying the ethical decision making framework (The Five Tenets) to the decisions made at KPMG SA which lead to the scandals in 2017/2018. 2) The Five Tenets Refer back to Chapter 5 – Ethical Decision Making, relating to The Five Tenets of ethical decision making, and be familiar with the key critical questions asked in order to evaluate the ethical nature of a decision or course of action. The Five Tenets should be applied to decisions or actions before they are implemented for best results, however can be applied after the decision or action has been implemented to learn from them. 3) Applying the Five Tenets to the Estina Dairy Farm scandal A Refer to pages 4 to 8 of your Ethics for Accountants and Auditors (4th cEdition) textbook or the end of these summary notes for background information relating to the scandal. r ical moment in the situation is that Jacques Wessels, KPMG SA Audit Partner, was made aware of the possible financial irregularities regarding the Gupta wedding expenses, by the tax manager. Had Wessels followed up on the financial irregularities KPMG SA probably would not have been negatively impacted and instead of being exposed in the wrongdoing they could have exposed it. Jacques Wessels had 3 choices: 1. He could have stopped the audit of Linkway Trading to investigate the irregularity brought to his attention; 2. He could have given Linkway a qualified audit opinion indicating that most of the Linkway’s finances were above board except for a single possible financial irregularity which fell outside the scope of the audit. 3. He could have given an unqualified audit opinion indicating Linkways’s finances were completely above board and that no financial irregularities were encountered. It is clear that Wessels opted for option three, giving Linkway an unqualified audit opinion. Let us review this decision based on the Five Tenets. Ethics 19 3.1) Tenet 1 TENET 1 Who will benefit and who will be harmed? Can we make a decision that harms no one? If not, can I make a decision that will result in the least harm to the fewest number of people and the most good for the greatest number of people? We would need to ask if giving Linkway an unqualified audit opinion harmed anyone or put anyone at risk? It is the responsibility of the auditing and accounting professionals to be objective, transparent and to safeguard the public and other stakeholders from financial mismanagement. Remember many financial investment decisions are made based on audit opinions. By ignoring the irregularity, Wessels put the interests of his clients above those of the stakeholders and additionally put the reputation of KPMG SA at risk, as he contravened the auditing standards. Essentially Wessels ignored all other stakeholders. Had Wessels decided to issue a qualified audit opinion, Linkway would have been placed under public scrutiny, which could have resulted in an investigation and the money-laundering could have been identified. KPMG SA’s reputation may have been safeguarded. This would have resulted in less harm to the fewer people when compared to issuing an unqualified opinion. Finally had Wessels decided to stop the audit and investigate the financial irregularity, KPMG SA might have uncovered the wrongdoings of Linkway which would have harmed Linkway but KPMG SA’s reputation for being objective and transparent would have been reinforced. This could also have resulted in Linkway being fully exposed which may have protected the stakeholder’s of Linkway. Given that Wessels opted to issue an unqualified opinion, we can see that his decision went against the First Tenet as he did not consider taking an action that would do the least harm to the fewest people. 3.2) Tenet 2 TENET 2 Can the decision or action be made into universal law that applies to everyone? Am I willing to have the decision or action done unto me? Does the decision or action protect the rights of those involved? We need to test the action taken by Wessels. If we made the decision taken by Wessels into a universal principle which all auditing firms should follow, would this be beneficial? The answer should be NO. If all auditing firms were to ignore financial irregularities and issue unqualified opinions, then no financial results could ever be trusted. Ethics 20  Investment decisions would not be based on true information and it would be easier for financial irregularities to take place. Wessels should have asked himself what if he was an investor in Linkway Trading (reversibility)? Would he have wanted to be an investor in such an entity? Providing an unqualified opinion goes against the Second Tenet. Had Wessels investigated the irregularity this would have been made into universal law – auditing firms must investigate financial irregularities. – and the world would be more financially stable with more transparency. Investors would feel more comfortable. 3.3) Tenet 3 TENET 3 Is the decision or action fair and equitable to everyone involved? If not, what is the fairness alternative? If one group of person gains priority, can this be justified? Wessels should have asked himself if “giving an unqualified opinion to Linkway, was fair and equitable to everyone involved?” The answer is NO. The decision was not fair to taxpayers or beneficiaries of the Estina Project. It was also not fair or equitable to KPMG SA to receive a payment for audit services, which were not rendered in terms of professional standards. Any benefits received by KPMG SA and Linkway cannot justify the decision. The decision put KPMG SA at great risk from a reputational point of view and further put great risk on the interested stakeholders of Linkway. Had Wessels investigated the irregularity, any further harm to stakeholders of Linkway would have stopped. Although Linkway would have been harmed by the investigation as they would have been exposed, this harm can be considered justified. It would have been the most fair and equitable decision for all parties. 3.4) Tenet 4 TENET 4 Is the decision or action furthering the common good? Does the decision or action serve my community as a whole? If I should publish my decision or action in a public forum, will people in my community support my decision or action? Wessels should have asked himself whether or not he would feel comfortable with publishing his decision to ignore the financial irregularity in the public, or to SAICA and the IRBA or to his colleagues at KPMG SA. The answer to this question should have been that he should have felt discomfort and should have indicated to him that the decision was not in the interests of common good. Additionally his decision to ignore the irregularity did not serve the community as a whole. Wessels should have asked where the funds were received from, as the Ethics 21  possiblility always existed that Linksway may have obtained the funds from an inappropriate means, which would indicate that the a stakeholder group was not being appropriately served. 3.5) Tenet 5 TENET 5 Does the decision or action make me feel like the person I am meant to be? Does the decision or action help me to meet my purpose or potential? Do I feel good about my decision or action, or have I acted deficiently or in excess? We cannot answer for Wessels, however we can assume that the decision he made did affect the purpose and potential of KPMG SA as a whole. Wessels and other KPMG partners and executives either resigned or were fired after the incident. From this we can assume that they had not met their own potential or lived up to their purpose of their profession, organisation or personal lives. Wessels must have known that his decision to ignore the irregularity would have consequences for his own and his colleagues’ careers as well as KPMG SA’s reputation. The purpose of the accounting and auditing profession is to safeguard stakeholder funds, by ignoring the irregularity, this purpose was not met. Had Wessels made the decision to investigate the irregularities he should have been able to answer yes the Fifth Tenet questions. 4) Summarising the outcomes of the Five Tenets and making the ‘right’ decision From the decisions available to Wessels, it is clear that the better decision was to either: 1) Provide a qualified audit opinion or, 2) Stop the issuing of the audit opinion and investigage the irregularity These two decisions would have reduced the risk to KPMG SA and ensured that the majority of stakeholders benefitted in the long run. 5) Additional application of the Five Tenets Refer to section 4.1 and 4.2 in your textbook for additional application relating to the Five Tenets and KPMG SA. 6) Conclusion The Five Tenets can help individuals and organisations to make better ethical decisions. The process evaluates the proposed decisions or actions based on whether or not they are ethical or not. Ethics 22 Unit 5 THE MODERN CORPORATION AND ITS MORAL OBLIGATIONS After studying this topic you should be able to: Explain why the moral status and obligations of corporations have become prominent Outcomes for this Provide arguments for and against corporate social responsibility unit Articulate what corporate moral agency entails Discuss the different strands of stakeholder theory Distinguish between the company as property and the company as an entity Explain the six capitals integrated reporting framework Overview of the Corporations have an influence on the societies in which they operate. study topic This chapter will explore the theories relating to a corporation’s moral obligations to the society in which they operate. Course material The following course material has been provided to you: Ethics for Accountants and Auditors (4th Edition) – Chapter 8 Lecture notes The modern corporation and its moral obligations – video Discussion board questions (Ethics week 3) Manner of This topic can be assessed through the application questions through the assessment following assessment types: Ethics quiz Integrated assignment Ethics test (written) 1) Introduction Corporates have an impact on society, culture and the environment, which has led to various concerns in recent years, leading to such questions as to: a) Do corporations have a social responsibility towards society or do they only have a responsibility to make a profit? b) Should corporations be regarded as moral agents with moral obligations? c) For whose benefit should corporations be managed? Some theories have been developed in an attempt to answer these questions. As accountants and auditors we need to have an understanding of these theories, as corporations are expected to present an integrated report which highlights not only the financial but also social and environmental performance of the corporation. We will look into social responsibility of corporations and then discuss whether or not corporations should be considered moral agents and finally discuss the different versions of stakeholder theory. Ethics 23  2) Corporate social responsibility Do corporations only have moral responsibility to their shareholders or do they also have responsibilities towards the societies within which they operate? a. Milton Friedman Friedman believed that businesses had any obligation other than making profits for their shareholders. Business executives are employees of the owners of the corporations and therefore should serve the interests of the employers – making profits, while conforming to the basic rules of society. As an individual the executives may have moral responsibilities which they can exercise privately. Corporations are not moral agents and therefore do not need to utilize corporate resources on social responsibility. If executives do so, they would be stealing company resources. Friedman saw funds being spent on social responsibility as a tax on shareholders. Under certain situations social responsibility can be justified. The first being when the owners decide to spend money on social responsibility as the owner is essentially spending money that belongs to him as he wishes. The second situation is when the corporation will stand to benefit from such social responsibility. In this regard the company is acting for its own benefit. Upskilling of local labour force would be an example of this. b. Christopher Stone Stone rejects the claims of Friedman, that managers only have a moral responsibility to make profits for shareholders and that corporations have no moral obligation to society. Managers obligations towards shareholders: There is no implicit promise from managers to shareholder’s to maximise profits (promissory argument). Most shareholders never meet the managers, so how can this promise exist. The second point Stone makes is with regards to the agency argument. Friedman believed managers act as agents of the shareholders – managers have a responsibility to look after the interests of the shareholders. Stone rejects this because both legally and factually it is wrong. Legally the courts do not recognize managers as agents of shareholders. Factually if this was the case managers would always seek the wishes of their shareholders and act accordingly. Corporations and the law: Stone believed that in addition to being required to obey the law, managers had a further obligation to act with moral responsibility towards society. The adherence to law needs to be complemented by self-initiated corporate social responsibility. Ethics 24  3) Corporate moral agency A corporation is considered a legal person (juristic person). As a legal person a corporation has specific rights and liabilities/obligations. Friedman again did not see corporations themselves as moral agents but only that the individuals within the corporation as such moral agents who can exercise their moral obligations in their personal capacity. a. Peter French French disagreed with Friedman that corporations were not moral agents. He considered the principles of moral responsibility - An agent must be linked to an event - The event must be intended by the agent What needs to be considered with regards to corporations is whether the event should be linked to the corporation or the individuals within the organization. French believed that corporations should be viewed as having corporate intentions and that their actions should be linked to the corporation. Corporate Internal Decision (CID) structure: Decisions within an organization, affecting the organization are made by individuals within the organization based on an organizational flow chart (organogram) and should comply with corporate policies. The decisions taken should be linked to the purpose of the organization. 4) Stakeholder theory Edward Freeman challenged Friedman’s shareholder primacy theory which is the premise that corporations should be managed only for the benefit of shareholders. a. Edward Freeman The shareholder primacy theory was rejected by Freeman on both a legal and economic argument. Legal argument: In recent years, many court cased have found that corporations have a duty towards stakeholders other than shareholders. Other stakeholders have included employees, customers, suppliers and local communities. Economic argument: When corporations pursue their own goals they often do so by polluting the environment or disrupting the local communities, which is not always balanced out. For this reason corporations need to be regulated and corporations need to become accountable for their corporate actions. Ethics 25  The stakeholder corporation: Within Kant’s classical theory on ethics, he stated that no person should be treated as a means to an end, but that all persons should be respected. Based on this Freeman argues that corporations and managers may not violate the rights of others while trying to achieve corporate objectives. Effectively corporations have moral objectives to respect the rights of both shareholders and all their stakeholders. Freeman’s theory implies that all stakeholders should be treated equally, however this opinion has resulted in division in terms of the equality of treatment. b. Kenneth Goodpaster Goodpaster challenges Freeman with regard to treating all stakeholders equally. He believes managers have a fiduciary duty to shareholders to maximize profits for shareholder benefit, which is similar to Friedman’s theory, however he believes that managers also have a moral obligation to other stakeholders of the corporation and that the fiduciary duty to shareholders cannot be at the expense of other stakeholders. Managers Local Shareholders community Corpration Suppliers Customers Employees Network of corporate stakeholders 5) The company as an entity Thomas Donaldson and James P. Walsh provide the view of the corporation as (1) property and (2) an entity. These views provide for a different understanding of moral obligations for corporations. When we see a corporation as property, the company serves the interests of the shareholders. Managers have moral obligations to ensure that the corporation serves the best interests of the shareholders. Ethics 26  When we see a corporation as an entity we consider the network of relationships it has with its various stakeholders and can see that the corporation will only be successful if it maintains good relationships with all its stakeholders, which is the responsibility of the managers. Within corporate governance structures and in terms of the Integrated Reporting Framework companies rely on six kinds of capital to operate and their operations also affect the same capital structures. Capital structures: 1) Financial capital (fund to run the operations) 2) Manufactured capital (infrastructure, equipment, etc. to run operations) 3) Intellectual capital (knowledge, ideas, etc. used in operations) 4) Human capital (competent and experience people to run operations) 5) Social and relationship capital (stakeholder relationships, trust and reputation) 6) Natural capital (environmental resources required for the operations) A successful company effectively uses the capital structures together and it can deliver on its mission and vision, which is acting in the best interests of the corporation. 6) Conclusion The various theories on social and ethical responsibility has shifted over time, to a view where corporations a viewed as moral agents with obligations towards society. Ethics 27 Unit 6 MANAGING ETHICS After studying this topic you should be able to: Explain why accounting and auditing professionals need a proper understanding of the governance and management of Outcomes for ethics this unit Identify the different elements of the ethics management process Distinguish between different kinds of codes of ethics that companies can opt to use Indicate what can be done to institutionalise ethics in organisations Describe what the process and standards of internal and external reporting on organisational ethics entails Overview of the We will look at a framework for governing and managing ethics in study topic organisations in a systematic and disciplined manner. Course material The following course material has been provided to you: Ethics for Accountants and Auditors (4th Edition) – Chapter 10 Lecture notes Managing ethics – video Discussion board questions (Ethics week 3) Manner of This topic can be assessed through the application questions though assessment the following assessment types: Ethics quiz Integrated assignment Ethics test (written) 1) Introduction Recent scandals have proved that there is no guarantee that organisations will behave ethically. It is very important that organisations closely manage their ethics. There are four important reasons why accountants and auditors should be familiar with organizational ethics management: 1) They need to ensure the organization they work for is ethical as it reflects on their professional reputation 2) Integrated reporting has become far more relevant and accountants and auditors need to be able to understand and advise clients in this regards 3) Auditors are expected to audit integrated reports 4) Accountants and auditors often serve on governing bodies which oversee ethical performance of organisations. The purpose of managing and governing ethics in an organization is to build a culture which makes it easy and natural for employees of the organization to behave ethically. Ethics 28  During this chapter we will discuss the various aspects of managing ethics in an organization. 2) Leadership commitment This is the most important aspect of managing ethics in an organization. If the leaders are not committed to behaving ethically, those who work for them will also not be committed. The company leaders (usually the board of directors) should set the ethical tone for the organization and should act with integrity and should not allow for personal interests to override acting in the best interests of the company. The commitment to ethics should be communicated to all stakeholders and sufficient resources (time, money and employees) should be provided to ensure ethics is effectively managed. All levels of management and leadership should be aware of and communicate ethical standards and values. 3) Governance structures The governing body of the organization should determine a strategy for determining and managing the ethical culture of the organization. The body should also approve the codes and policies that will provide ethical guidance. The governing body should also provide oversight of the ethical performance of the organization. This implies that management of the entity should provide regular reports relating to the ethical performance of the company. In accordance with the Companies Act of South Africa, it is a requirement for certain companies to establish a Social and Ethics Committee. 4) Ethics management The governing body and their sub-committees are very important in the oversight of the ethics management however they are not involved in the day to day operations of the corporation. The responsibility for the management of ethics therefore needs to be tasked to a person or group of people within the organization. It should be written into their job description, and they should be referred to as the ethics officer. The ethics officer is responsible for five ethics management activities: 1) Ethics risk assessment 2) Ethics strategy 3) Code of ethics and policies 4) Institutionalisation of ethics 5) Monitoring and internal reporting Ethics 29  1) Ethics risk assessment Risk – conditions or behaviours that effect a company either positively or negatively Ethics risk is potentially detrimental or beneficial outcomes cause by ethical and unethical behaviours. Both positive and negative ethical risks should be determined through stakeholder engagement. Risks identified should be weighed up for significance and probability of occurrence. 2) Ethics strategy Once significant risks have been determined strategies need to be developed in order to manage this risk (achieving or avoiding). The entity will need to determine their desired state of ethics that they wish to achieve. Thereafter they can determine which strategy they wish to apply. Strategies include a compliance strategy and an integrity strategy. Compliance strategy Objective is to prevent unethical behaviour. Codes of ethics and standards are set and the organization is measured against these codes and policies. When deviations from codes or policies are identified corrective action and disciplinary action is taken. A compliance strategy is a rules-based aapproach. Integrity strategy This is a value-based approach which focuses on raising the ethical responsibility within the organization. Instead of focusing on minimizing incidences of unethical behaviour, the organization promotes ethical responsibility. This approach requires all employees to take responsibility for ethical performance. Once a strategic approach has been determined, areas of focus need to be determined and then responsibilities and resources need to be planned. 3) Code of ethics and policies Ethical standards need to be set to guide the organization. The standards are normally laid out in a code of ethics or ethics policies. A code of ethics identifies the standards of ethical behaviour that all employees need to adhere to. They are also used to assess the ethical performance of the organization as a whole. Codes of ethics can either be directional or aspirational. Directional codes: Very specific codes which clearly prescribe what behaviour is unacceptable and what is expected of employees. Ethics 30  Strengths: - They are very specific - The clearly state what should or should not be done Weaknesses: - There is very little discretion allowed for employees (leads to “if its not forbidden it must be allowed). - Can result in too many rules, which makes them difficult to recall and enforce. Aspirational codes: Codes that are less directive and identify with ethical values, norms and principles that should guide employees in their actions. Employees can use discretion in their jobs. Strengths: - They are short codes which make them easy to recall therefore more easy to live by Weaknesses: - Can be considered vague with not enough guidance. - Can be considered to lack in authority Determining which code to use is aligned to the ethics strategy of the organization. Directional codes are more appropriate for compliance strategies while aspirational codes are better for integrity strategies. 4) Institutionalisation of ethics The process that has followed above needs to be instilled within the organization – made real. The process of institutionalizing ethics within the organization is done as follows: 1) Communicating the organisation’s ethical expectations clearly with all stakeholders. 2) Training stakeholders on the ethical expectations so that they may better understand how to achieve them. 3) Selection and promotion involve selecting (hiring) and promoting key people within the organization who display integrity to ensure ethical expectations can be maintained. 4) Reward and discipline involve ensuring that good ethical behaviour is rewarded and unethical behaviour is punished. 5) Safe reporting system involves ensuring that stakeholders feel safe when wanting to report unethical behaviour. 6) Information management system must be established to collect data relating to ethical matters so that it may be monitored, investigated, reported on and additional strategies developed. 5) Monitoring and internal reporting Using the information from the information management system the organization can use the information to analyze and interpret their ethical performance and then to report thereon within Integrated Reporting or in Social and Ethics Committee meetings. Ethics 31  5) Independent assessment and external reporting It is important for an organization to assess their ethical performance however it should be done independently either through internal audit functions or by an external party. Internal auditors usually assess adequacy and effectiveness of ethics management. This will determine whether or not the organization has achieved its desired ethical outcomes. Organisations are expected to report to their stakeholders regarding ethics as part of the external reporting (triple bottom line or integrated reporting). Stakeholders should be able to understand and interpret the reports. 6) Ethical culture Ethical culture is about making ethical conduct a norm within an organization. We can distinguish between fear-based and conviction based ethical cultures. Fear-based are those where people behave ethically because they fear the consequences. Conviction-based is motived by the people themselves and their belief in doing the right thing, which results in less monitoring being required. 7) Conclusion The process of governing and instilling ethics within an organization requires careful planning and consideration and monitoring. Accounting and auditing professional need to understand how ethics is institutionalised within their own organizations and those of their clients. Ethics 32 Unit 7 ACCOUNTANTS AND AUDITORS AS PROFESSIONALS After studying this topic you should be able to: Discuss the difference between personal ethics and professional ethics Outcomes for Understand the concepts of profession and professionalism this unit Demonstrate an awareness of the background and development of professions Discuss the characteristics that are useful in distinguishing professional from non-professional occupations Discuss whether accountants and auditors are members of a profession Illustrate the dimensions of professionalism with specific reference to the accounting and auditing professions Discuss the desirability of licensing of individuals to perform professional services Explain the key roles of the professional accounting bodies operating in South Africa Overview of the We will look at the professional ethics of accountants and auditors as study topic well as establish how to distinguish professionals from non- professionals. Course material The following course material has been provided to you: Ethics for Accountants and Auditors (4th Edition) – Chapter 12 Lecture notes Accountants and auditors as professionals – video Discussion board questions (Ethics week 3) Manner of This topic can be assessed through the application questions though assessment the following assessment types: Ethics quiz Integrated assignment Ethics test (written) 1) Introduction In chapter 2 we established the ethics and morality are used interchangeably and refer to whether behaviour is acceptable or responsible. Personal ethics was identified as the ethics of the individual and can be affected by religion, beliefs and experiences. Organisational ethics is the ethics which focuses on the behaviour relating to an organization. Professional ethics is the set of standards adopted by professionals. Ethics 33  2) What is a professional? A profession is established because of a social need for services which require specialized knowledge and skills. Such professionals wish to gain from their specialized knowledge and skills and wish to control the market by creating an education and training system which results in only accepting those into the profession who are competent. It is important to be able to distinguish professionals from non-professionals through the key characteristics of professionals: 1) Entrance into the profession requires an extensive period of education and training. 2) Professional knowledge and skill are essential to the well-being of the larger society. 3) Professionals usually have a monopoly on the provision of professional services. 4) Professionals often have an unusual degree of autonomy when rendering services. 5) Professionals claim to be regulated by ethical standards 3) Types of professionals in society ALTURISM ADVOCACY LICENCED CLASSIC TRUST-SEEKING EXPERTISE - Doctor - Financial planner - Engineer - Lawyers - Investment bankers SOCIAL EFFICIENCY BARRIER ESOTERIC PROFESSING OWNER-AGENT KNOWLEDGE - Academics - Management - Policymakers - Advertising - Consultants PUBLIC SPHERE PRIVATE SPHERE Horizontal axis is work performed for the benefit of the public or private. Vertical axis is there a need to license professionals to distinguish their level of knowledge The social efficiency barrier indicates where social welfare is enhanced if professional groups are pre-certified as the public would not be required to establish the competence of the service provider. Above the social efficiency barrier we would expect services providers to be licensed and below the barrier the risk of assessing competence of the service provider is that of the individual. Four professionals are determined: 1) Classic Those who service the public sphere would be expected to be licensed. Ethics 34  2) Trust-seeking Members require licensing and they service mostly a private client and service the needs of the client. 3) Professing Members are actively involved in creating knowledge and is generally in the public interest. No licensing is required. 4) Owner-agent No formal licensing is required and they service the private interests of whoever pays for their services. In terms of accountants it is important to distinguish between an accountant who performs duties of an accountant and an auditor or chartered accountant. Auditors are placed above the social efficiency barrier as formal licensing is required. 4) Professional bodies Professional bodies have a responsibility to protect the standing of their professions as such they: 1) Regulate entrance to the profession through education and training 2) Administers a registration system for candidates who want to practice as professionals 3) Sets or controls the technical standards with which its members must comply 4) Issues ethical standards to the members of the profession so that good conduct is the norm Various professional bodies within South Africa that are linked to the accounting profession: 1) South African Institute of Chartered Accountants (SAICA) 2) South African institute of Professional Accountants (SAIPA) 3) Chartered Institute of Management Accountants (CIMA) 4) Association of Chartered Certified Accountants (ACCA) 5) Institute of Internal Auditors (IIA) 6) Independent Regulatory Board of Auditors (IRBA) 5) Conclusion Chartered accountants and auditors may certainly be considered professionals. As a professional they should aim to ensure that professional services are rendered in the public interest and should comply with the necessary professional ethical standards. Ethics 35