Week 2. Ethics in management decision making.pdf

Acknowledgment of Country I acknowledge the traditional custodians of the Macquarie University land, the Wallumattagal clan of the Dharug nation, whose cultures and customs have nurtured, and continue to nurture, this land, since the Dreamtime...

Acknowledgment of Country I acknowledge the traditional custodians of the Macquarie University land, the Wallumattagal clan of the Dharug nation, whose cultures and customs have nurtured, and continue to nurture, this land, since the Dreamtime. We pay our respects to Elders past, present and future. Department of Accounting and Corporate Governance 1 ACCG3001 WEEK 2 Ethics in Management Decision Making ❑ Textbook – Chapter 1 (pp. 25-26) ❑ Ghillyer 2018 – Chapter 2 (pp. 22-34), Chapter 3 (pp. 54-58), Chapter 7 (pp.144-151) ❑ Parkes et al. 2016 – Chapter 14 (pp. 634-640) ❑ Foleo Fones Case Study – Chapter 2 Learning Outcomes 1. Define the term Ethics 2. Explain the ethical theories (Teleological/Deontological) 3. Discuss the impacts of business ethics on various stakeholders 4. Describe the Code of Ethics for Professional Accountants 5. Explain the ethical challenges faced by accountants 6. Solve an ethical dilemma by applying the 5-step ethical decision- making model 7. Discuss the ethics of whistle-blowing 2 What is ethics? Ethics: a system of moral principles that affect how people make decisions and live their lives Central question: What ought one to do? (How should I live?) Common sayings include: ― Don’t hurt people ― Do no harm ― Don’t tell lies ― Do unto others as you would have them do unto you 3 Ethical theories Ethics is about making a ‘right’ choice or a ‘good’ decision Ethics involves examination of principles, values, duties and norms, and consideration of available choices to make decision Ethical theories are used to help people decide best course of action ― Teleological theories ― Deontological theories 4 Teleological (Consequentialist) theories Results-oriented ethics Consequences (the ends) of any action should be the basis for making decision Action results in a good consequence → ethical Utilitarianism: ― Individuals need to maximise their utility (happiness) so that society’s utility can be maximised ― What decision would cause the least harm/ provide the greatest good to the greatest number? ― Most basic form: cost-benefit analysis 5 Deontological (Non-consequentialist) theories Ethics of decision is determined by the process of the decision (the means) Duty-based ethics. Concerned with duty and rules Action is motivated by goodwill that stems from a sense of duty → ethical Do unto others as you would have them do unto you The end does not justify the means, i.e. you should not take advantage of people to achieve a certain end 6 Business ethics Business ethics: application of ethical standards to business behaviour Should not be applied as a separate set of moral standards or ethical concepts from general ethics Stakeholder: someone with a share or interest in an organisation ― E.g. shareholders, employees, customers, suppliers, creditors… ― Involvement of the stakeholders with the actions of the organisation ― Extent to which they would be impacted by unethical behaviour 7 Stakeholder impact from unethical behaviour Example: worldcom scandal and its impact on the key stakeholders 8 Factors ensuring ethical conduct Corporate governance: system by which business corporations are directed and controlled Code of ethics: written standards of ethical behaviour designed to guide managers and employees in making the decisions and choices they face every day ― An internal document: clear guide to managers and employees in making decisions ― A message to the organisation's stakeholders: commitment to the highest standards of ethical behaviour Let’s check out Westpac’s code of ethics https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/WBC- Corporate-Governance-Statement.pdf 9 Code of Ethics for Professional Accountants In Australia, management accountants may join: ― Certified practising accountants (CPA) Australia ― Chartered accountants ANZ (CA) ― Institute of Chartered Accountants in Australia (ICAA) ― Institute of Public Accountants (IPA) ― US Institute of Management Accountants (IMA) ― UK Chartered Institute of Management Accountants (CIMA) Code of Ethics for Professional Accountants ― Issued by the Accounting Professional and Ethical Standards Board ― Mandatory for all members of the accounting profession 10 Code of Ethics for Professional Accountants Fundamental principles: Integrity straightforward, honest in professional and business relatio nships Objectivity not compromise judgement because of bias, conflict of interest, undue influence of others Professional competence and due care maintain professional knowledge and skill Confidentiality not disclose confidential information Professional behaviour comply with relevant laws and regulations 11 Practice question The Hawke Foundation (the Foundation) is a not-for-profit organisation that works with communities around Australia to help combat homelessness. You are a newly qualified Chartered Accountant working at the Foundation, reporting to your manager, Tani. The Foundation has been involved with a project to build an affordable housing of 15 townhouses and 25 apartments close to the Sunshine Coast. As you review the schedule, you notice that one of the building materials has an unfamiliar product code. When you look it up you find that it’s a cladding product purchased from NG Building Supplies (NGBS). You remember that the Foundation stopped using this supplier in building projects several years ago. NGBS’ cheaper, plastic cladding products were mentioned in a review of a building fire incident as they are not an effective fire-retardant. However, the cladding is approved for use under Australian building regulations. The Sunshine Coast housing project is nearing completion and you’re reviewing some of the costing schedules provided by the building company to calculate the work-in-progress (WIP) value. You’re feeling uncomfortable about this plastic cladding being used on the project but are unsure what you should do. You could pass the information on to your manager, Tani, or just ignore it and process the WIP report. If you decide to ignore the information, what principle of the Code could be threatened? A. Integrity B. Objectivity C. Professional competence and due care D. Confidentiality E. Professional behaviour 12  Ethical challenges faced by accountants Auditing function: the certification of an organisation’s financial statements as being accurate by an impartial third party professional Ethical dilemma faced by internal auditors, external auditors//auditing firms ― are paid by the organization which is being audited, ― but serve the general public who are in search of an impartial and objective review. 13 Ethical challenges faced by accountants Accountants face ethical challenges when requests are made for: ― Falsifying accounts ― Underreporting income ― Overvaluing assets ― Taking questionable deductions ― Unrealistic delivery deadlines ― Reduced fees ― Fees that are contingent on providing numbers satisfactory to the client Complex situation when accounting firm has a separate consulting relationship with client. E.g. Arthur Anderson and Enron 14 Ethical challenges faced by accountants Financial reports must comply with Australian accounting standards and Corporations Act Creative accounting: accounting practices that follow required laws and regulations, but deviate from what those standards intend to accomplish ― Capitalises on loopholes in the accounting standards to falsely portray a better image of the company ― Legal, but loopholes they exploit are often reformed to prevent such behaviours 15 Ethical dilemmas Situations in which there are no obvious right or wrong decisions Occur when the decision requires you to make a right choice knowing full well that you are: − Leaving an equally right choice undone − Likely to suffer something bad as a result of that choice − Contradicting a personal ethical principle in making that choice − Abandoning an ethical value of your community or society in making that choice 16 Ethical decision making model 5-step model: 1. Identify the facts of the dilemma and define the ethical issues it raises 2. Identify the principles or theoretical frameworks that could be used to address the dilemma 3. Identify alternative courses of action that could be taken and the effect on stakeholders 4. Match the alternatives from step 3 to the principles/frameworks in step 2 5. Determine which course of action to take 17 Example (From Foleo Fones Case Study) Assume you are the management accountant for Foleo Enterprises Pty Ltd and are bound by the Code of Ethics of the accounting body to which you belong (CPA). The company has serious cash flow problems and is not likely to get financed by the bank for a new project. James Ford, the director, pressures you to hide the cash flow problems by “getting creative” with the accounts. What would be your response? Explain using the 5-step ethical decision making model. 18  Suggestion 1. Outline the facts of the dilemma and define the ethical issues it raises ― James asks you to “get creative” with the accounts to hide cash flow problems ― Dilemma: maintaining professional ethics vs. remaining loyal to company 2. Identify principles or theoretical frameworks to address the dilemma ― Principles: Code of Ethics for Professional Accountants (which ones?) (Integrity, Objectivity, Professional behaviour) ― Theoretical frameworks: ▪ teleological theory ▪ deontological theory 19 3. Identify alternative courses of action and the effect on stakeholders ― Hide the cash flow problems; effect: bank may not get loan repaid, but you can keep your job. ― Do not hide the cash flow problems; effect: The company may not receive the fund from the bank so expansion can’t go ahead; bank is protected from losing money; you may lose your job. 4. Match the alternatives to the principles/frameworks ― Hide the cash flow problems ▪ Principles: breach Integrity, Objectivity, Professional behaviour → unethical ▪ Teleological: bank finding out and calling in other loans, company bankrupt, creditors and employees unpaid, you expelled from CPA → unethical ▪ Deontological: always wrong to be dishonest → unethical 20 4. Match the alternatives to the principles/frameworks (cont.) ― Do not hide the cash flow problems ▪ Principles: does not breach → ethical ▪ Teleological: may not achieve funding and may lose job, but bank, creditors and employees not deceived or robbed of payment, your integrity maintained → ethical ▪ Deontological: duty of honesty upheld → ethical 5. Determine which course of action to take ➔ Do not hide the cash flow problems – most ethical course of action based on the above analysis. 21 Whistle blowers Whistle-blower Employee who discovers corporate misconduct and chooses to bring it to the attention of others Internal whistle-blowing Employee discovering corporate misconduct and bringing it to the attention of his or her supervisor External whistle-blowing Employee discovering corporate misconduct and bringing it to the attention of law enforcement agencies and/or the media 22 When is whistle-blowing ethical? 1. When the company, through a product or decision, will cause considerable harm to the public or break existing laws 2. When the employee identifies a serious threat of harm 3. When the employee’s immediate supervisor does not act, the employee should exhaust the internal procedures and chain of command to the board of directors 4. Employee must have documented evidence that: ▪ His or her view of the situation is accurate ▪ The firm’s practice, product, or policy threatens the public or product user 5. Employee must have valid reasons to believe that revealing the wrongdoing to the public will result in the changes necessary to remedy the situation 23 When is whistle-blowing unethical? Motivated by financial gain or media attention Employee is carrying out a revenge against the company 24