BUSINESS ETHICS: AN INTRODUCTION

Ethics: Moral principles and values applied to social
behavior.

Business Ethics: Moral principles and values applied to
situations that arise in a business setting.

A particular challenge facing businesses is ethically
balancing the competing demands of multiple groups of
stakeholders – e.g., shareholders, employees, retirees,
suppliers, creditors, customers, the communities in
which the business operates – whose lives are affected
by business decisions.
Ch. 2: Ethics and Professional Responsibility - No. 1
Business Law Today: The Essentials (7th ed.)
“LEGAL” VS. “ETHICAL”

Legal Behavior: While certain actions are clearly legal or
illegal, many decisions faced by businesses fall within one or
more “gray areas” of the law, where probability, rather than
certainty, will guide the decisionmakers.

Ethical Behavior: Even where a contemplated action is
clearly legal (or, in some circumstances, illegal), business
decisionmakers should also consider whether the action is
“ethical.”

While personal ethics are (or can be) subjective, certain
guides are available to businesses trying to meet or exceed the
moral minimum (i.e., the minimally acceptable standard for
ethical business behavior):

corporate and professional codes of ethics and
compliance programs;

public opinion and sentiment; and, of course,

personal morality.

For businesses operating in more than one place, the
moral minimum may vary from place to place –
particularly when businesses operate abroad.
Ch. 2: Ethics and Professional Responsibility - No. 2
Business Law Today: The Essentials (7th ed.)
SETTING THE ETHICAL TONE

Management Attitudes: Managers who are not committed to
creating and maintaining an ethical workplace rarely have
one.

Employees tend to follow what they perceive to be
management’s lead, so managers must model ethical
behavior for their employees.

Managers who “look the other way” because an
unethical employee is successful risk other employees
believing that acting unethically is the key to success.

Managers should set realistic goals for their employees
to reduce the incentive to “cheat” in order to achieve
management’s goals.

Codes of Conduct: Many businesses have formalized their
ethical expectations in a written code of conduct.

Training: Businesses with and without formal codes of
conduct should talk with their employees about the
importance of behaving ethically and should consider inhouse or out-sourced ethics training programs.
Ch. 2: Ethics and Professional Responsibility - No. 3
Business Law Today: The Essentials (7th ed.)
CORPORATE COMPLIANCE PROGRAMS

Sarbanes-Oxley Requirements: The Sarbanes-Oxley Act of
2002 requires publicly-traded corporations to set up programs
to enable employees to confidentially report certain types of
suspected illegal or unethical behavior. Some companies
encourage employees to report illegal or unethical behavior
that is outside the scope of Sarbanes-Oxley.


Wed-based Reporting: Confidential reporting systems,
like Ethicspoint™, allow employees of subscribing
companies to report suspect behavior to a third party,
which then alerts management or the audit committee of
the subscribing companies of information reported to it.
Compliance programs must be consistent and consistently
applied across all departments of a company, and should be
coordinated and monitored by a committee or “chief
governance officer” that is not looking out for the “turf” of a
particular department.
Ch. 2: Ethics and Professional Responsibility - No. 4
Business Law Today: The Essentials (7th ed.)
DUTY VS. OUTCOME


Duty-Based Ethics: Ethics based upon an underlying concept
of duty regardless of the consequences of action taken or
foresworn in keeping with duty. Duty-based ethics generally
arise from religious belief or philosophical reasoning.

Categorical Imperative: In deciding whether an action
is ethical, one should consider what the effect would be
if everyone similarly situated acted in the same way.

Principle of Rights: In deciding whether an action is
ethical, one should consider what effect her actions
would have on the fundamental rights of others.
Outcome-Based Ethics (a.k.a. “situational ethics”): Ethics
based upon the consequences of action taken or foresworn,
without regard to any underlying concept of duty or morality.

Utilitarianism dictates that a decision to act or not act
should be directed to producing the greatest good for the
greatest number of people.

Applying utilitarianism (or any outcome-based ethical
rule) requires a cost-benefit analysis of the negative and
positive effects of the proposed act or omission on the
individuals who are likely to be affected by it.
Ch. 2: Ethics and Professional Responsibility - No. 5
Business Law Today: The Essentials (7th ed.)
ACCOUNTANTS’ DUTY OF CARE

An accountant must possess the skills that an ordinarily
prudent accountant would have and exercise the degree of
care that an ordinarily prudent accountant would exercise.

The skills and care of an ordinarily prudent accountant are
reflected in the

generally accepted accounting principles (“GAAP”)
promulgated by the Financial Accounting Standards
Board (FASB), and the

generally accepted auditing standards (“GAAS”),
promulgated by the American Institute of Certified
Public Accountants (AICPA).

An accountant conforming to GAAP or GAAS, and acting in
good faith, will normally not be held liable for incorrect
judgments or for relying on incorrect information.

On the other hand, a violation of GAAP or GAAS will be
prima facie evidence of the accountant’s negligence, subject
to the accountant clearly qualifying her opinion or
disclaiming liability for particular errors.
Ch. 2: Ethics and Professional Responsibility - No. 6
Business Law Today: The Essentials (7th ed.)
ATTORNEYS’ DUTY OF CARE

An attorney owes her client the duty to provide competent
and diligent representation.

An attorney must know well-settled principles of law
applicable to a case and discover what law can be found
through a reasonable amount of research.

An attorney’s competence and diligence are judged against
those of a reasonably competent general practitioner of
ordinary skill, experience, and capacity, unless the attorney
holds herself out as being expert in some area of law, in
which case she is held to the higher standard of care expected
of a reasonably competent expert practitioner in that area of
the law.
Ch. 2: Ethics and Professional Responsibility - No. 7
Business Law Today: The Essentials (7th ed.)
SARBANES-OXLEY AND
PROFESSIONAL LIABILITY


The Sarbanes-Oxley Act, which took effect in 2002, imposes
a number of strict requirements on both domestic and foreign
public accounting firms that audit corporations whose
securities are offered for sale to the U.S. investing public.
Two basic Sarbanes-Oxley requirements are:

Auditor Independence: See p. 215 for a description of
the various elements of auditor independence imposed
by Section II of Sarbanes-Oxley.

Document Veracity and Retention: Sarbanes-Oxley
prohibits falsifying or destroying corporate records with
the intent of obstructing or influencing a federal
investigation or in relation to bankruptcy proceedings.
Public Company Accounting Oversight Board: The agency
created by Sarbanes-Oxley to oversee the audit of public
companies and to report on its activities and findings to the
Securities and Exchange Commission.
Ch. 2: Ethics and Professional Responsibility - No. 8
Business Law Today: The Essentials (7th ed.)
FOREIGN CORRUPT PRACTICES ACT

In response to numerous scandals involving U.S. companies
paying bribes to foreign government officials in order to gain
strategic concessions, Congress passed the Foreign Corrupt
Practices Act (FCPA) in 1977, which:
(1) prohibits any U.S. company, director, officer,
shareholder, employee, or agent from bribing any
foreign government official if the purpose of the
payment is to get the official to act in her official
capacity to provide business opportunities to the party
offering the bribe;

The FCPA does not prohibit bribery of minor
officials whose acts are purely ministerial, as long
as such payments are legal in the foreign country.
(2) requires U.S. companies to keep detailed accounting
records that “accurately and fairly” reflect all foreign
activities;
(3) prohibits anyone from making false statements or false
entries in said records; and
(4) provides sanctions against both companies and
individual agents who violate the FCPA.
Ch. 2: Ethics and Professional Responsibility - No. 9
Business Law Today: The Essentials (7th ed.)