1. Explain briefly the meaning of ethics.
2. Describe how ethics and economic progress
are connected.
3. Describe briefly the function of corporate social
responsibility (CSR).
4. Recount the events in some of the more famous
corporate financial scandals.
5. Explain how ethics can be taught.
6. Explain how internal controls can facilitate ethical
behavior and help prevent financial impropriety.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–2
Philosophical Principles of Ethics
Imperative
Principle
Do what is right.
Generalization
Argument
Do what is right, but
filter the action by
consideration of the
consequences.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Utilitarian
Principle
Do what produces
the greatest good.
7–3
What Is Ethics?
• Ethics
– The branch of philosophy that addresses the values
pertaining to human behavior, with regard to the
“rightness” and “wrongness” of actions and to the
“goodness” and “badness” of the intent and results of
such actions
• Integrity
– Adherence to moral and ethical principles; soundness
of moral character; honesty. As a practical matter, a
person of integrity knows what is right and has the
courage to do it
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–4
EXHIBIT 7.1
BASIC STEPS IN ETHICAL DECISION-MAKING
1. Define all the facts and circumstances,
including who, what, where, when, and how.
2. Identify the people affected by the situation
and their rights and obligations.
3. Identify the alternative decisions and
consequences.
4. Make the decision: determine the right thing
to do and then do it.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–5
EXHIBIT 7.2
THE BBB CODE OF BUSINESS PRACTICES
1. Build Trust: Establish and maintain a positive track record in the marketplace.
2. Advertise Honestly: Adhere to established standards of advertising and
selling.
3. Tell the Truth: Honestly represent products and services, including clear and
adequate disclosures of all material terms.
4. Be Transparent: Openly identify the nature, location, and ownership of the
business, and clearly disclose all policies, guarantees, and procedures that
influence a customer’s decision to buy.
5. Honor Promises: Abide by all written agreements and verbal representations.
6. Be Responsive: Address marketplace disputes quickly, professionally, and in
good faith.
7. Safeguard Privacy: Protect any data collected against mishandling and fraud,
collect personal information only as needed, and respect the preferences of
customers regarding the use of their information.
8. Embody Integrity: Approach all business dealings, marketplace transactions,
and commitments with integrity.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–6
Ethics in Business and Society
• For ethical business activity to occur, mutual
trust, fair dealings, and honest communication
are essential.
• Ethics and Economics
– Unethical behavior (e.g., inside information)
destroys fair investment markets
– Commonly-shared positive ethical values regarding
respect for individuals, their lives, their property,
and their freedoms promote individual integrity and
doing the “right thing”
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–7
EXHIBIT 7.3
FCPA VIOLATIONS AND CORRUPTION PERCEPTIONS INDEX
FOR SELECTED COUTRIES
Corruption Perceptions Index (CPI) is published each year by Transparency
International, providing metrics to the potential corruption risk for 180 countries.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–8
What Is Corporate Social Responsibility?
• Corporate Social Responsibility (CSR)
– A firm’s obligations to society, including the welfare
of people and places affected by its activities
• CSR Actions
– Provide quality products or services
– Engage in ethical accounting and principled business
practices
– Be responsible for fair treatment of employees
– Meet the firm’s obligations to all stakeholders
• Customers, suppliers, creditors, lenders, and investors
– Care for and protect the environment
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–9
Rules, Policies, and Guidelines
• Making an ethical choice:
– Follow legal rules
– Apply the formal ethical policies of your organization
– Use your moral intuition to answer the following:
• What would your mother or father say if you acted in that way?
• How would you feel if you saw your situation described in the
newspaper?
• Does the situation “smell bad?”
• Would you use your behavior as a marketing tool?
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–10
Making an Ethical Decision
• The Principle of Consistency
– Considering what would be the consequences
if everyone made the same choice that you
are about to make.
• The Principle of Respect
– To apply the principle of respect, you would
choose the alternative or choice that treats
people with the greatest respect.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–11
EXHIBIT 7.4
STEPS TO ENSURE INTEGRITY AT EXXONMOBIL
• A substantial majority of the Board of Directors are non-employees.
• The Board Audit Committee is empowered to investigate any
matters brought to its attention and has 100 percent non-employee
membership.
• An independent internal audit staff assesses compliance with
policies and procedures, and evaluates control effectiveness in
about 300 audits conducted annually around all business units.
• Steps are taken to assure the independence of both internal and
external auditors.
• Employees regularly review and discuss expectations, and are
encouraged to raise questions or concerns.
• Violations are promptly reviewed, communicated upward, and acted
upon.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–12
Financial Scandals: Enron Bankruptcy
• Enron
– Was a major global provider of electricity, natural gas,
pulp and paper, and communications services
– Used innovative and misleading accounting in “cooking
its books” to avoid disclosing unprofitable operations
– Was a key event leading the U.S. Congress to pass a
new federal securities law for financial accounting
and reporting transparency, the Sarbanes-Oxley Act of
2002, often referred to as “SOX”
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–13
Financial Scandals: WorldCom Bankruptcy
• WorldCom
– Used fraudulent accounting methods to manipulate
earnings to present a false image of growth and
prosperity to prop up the firm’s stock price
– Underreported “line costs” as assets rather than
expensing them and fraudulently overstated revenues
– Internal auditors eventually discovered the fraud and
the firm filed for bankruptcy protection which wiped
out the investments of stock and bond holders
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–14
Financial Scandals: Vivendi
• Vivendi
– Used fraudulent accounting methods for several years
to hide cash flow, liquidity, and financial obligation
problems to boost its apparent financial performance
to enhance its stock price and make several
acquisitions
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–15
Financial Scandals: Parmalat Bankruptcy
• Parmalat
– Used risky derivatives and purchase of its own debt
to disguise losses in several of its new international
acquisitions
– Was placed under control of a commissioner by the
Italian government after the firm collapsed into
bankruptcy when it could not pay of its debt and
make its bond payments
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–16
Other Financial Scandals
• Teapot Dome Scandal
– Resulted from the secret leasing of Teapot Dome oil
reserves to a businessman who paid Secretary of the
Interior Albert Fall hundreds of thousands of dollars in
zero-interest loans
• Ponzi (Pyramid) Scheme
– A fraud in which money received from later investors
is used to provide returns to earlier investors, thus
giving an appearance of a profitable investment
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–17
Can Ethics Be Taught?
Personal
integrity
Corporate
governance
Fundamentals
of Ethics
Education:
Ethical
leadership
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Responsibility
of business in
society
Ethical
decisionmaking
7–18
EXHIBIT 7.5
HOW DO YOU MEASURE SUCCESS?
Many people think of fame and fortune when they measure
success. However, at some point in life, most people come
to realize that inner peace and soul-deep satisfaction come
not from fame and fortune, but from having lived a life based
upon integrity and noble character. President Lincoln put it
this way: “Honor is better than honors.”
At a Congressional Hearing on ethics in July 2002, Truett
Cathy, founder of Chick-Fil-A, quoted Proverbs 22:1: “A
good name is more desirable than great riches; to be
esteemed is better than silver or gold.” In the final analysis,
living an honorable life really is more satisfying than fame
and fortune. How do you measure success?
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–19
EXHIBIT 7.6
ETHICS IN BUSINESS AND SOCIETY: SELECTED QUOTATIONS
• “ Associate with men of good quality, if you esteem your own
reputation; for it is better to be alone than in bad company.” (George
Washington)
• “Honor is better than honors.” (Abraham Lincoln)
• “To educate a person in mind and not in morals is to educate a
menace to society.” (Theodore Roosevelt)
• “A good name is more desirable than great riches; to be esteemed is
better than silver or gold.” (King Solomon)
• “To see what is right and not to do it is want of courage.” (Confucius)
• ”It has become dramatically clear that the foundation of corporate
integrity is personal integrity.” (Sam DiPiazza, CEO of
PricewaterhouseCoopers)
• “A people that values its privileges above its principles soon loses
both.” (Dwight D. Eisenhower)
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–20
Internal Controls
• Internal Controls
– A system of rules and procedures designed to
ensure the accuracy and reliability of financial
and accounting information
• Internal Control Procedures
– Preventing accidental errors and irregularities
(intentional misrepresentations)
– Identifying errors and irregularities for
corrective action
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–21
Foreign Corrupt Practices Act
• Foreign Corrupt Practices Act (FCPA) of 1997
– Applies to U.S. firms and to foreign firms that
engage in business in the U.S.
– Consists of two parts:
• An anti-bribery provision
• A requirement to maintain an adequate internal
control system over financial books and records
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–22
Sarbanes-Oxley Act (“SOX”) of 2002
• Sarbanes-Oxley Act (“SOX”) of 2002
– Increased the prison sentence for fraud to 25 years
– Established 20-year sentences for destroying, altering,
or fabricating records in federal investigations, or any
scheme to defraud shareholders
– Requires that the Chief Executive Officer and Chief
Financial Officer of a publicly traded corporation must
certify that its financial statements accurately
presents the firm’s financial condition and results of
the firm’s operations
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–23
Computer Security of
Accounting Information
• Basic Threats to Computer Security
–
–
–
–
–
Natural disasters
Dishonest employees
Disgruntled employees
Persons external to the organization
Accidental errors and omissions
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–24
KEY TERMS
ethics
integrity
Corruption Perceptions Index (CPI)
corporate social responsibility (CSR)
mark-to-market accounting
Ponzi scheme
internal controls
Foreign Corrupt Practices Act
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–25