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Ethics Definitions Ethics “It relates to the individual character + the moral rules that govern and limit our conduct, investigating questions of right and wrong, duty and obligation, and moral responsibility” Self Interest “Thinking of one’s own interests rather than that of the group, community, society or profession” Public Interest “This is our professional responsibility. It means acting in the best interests of our clients and the profession overall (aligned with stakeholder theory) in contrast to protecting one’s own personal and /or selfish interests” Fiduciary Responsibility “This is also aligned to our professional responsibility where we make technically accurate, competent and ethical decisions to ensure that our agent responsibility to the owner’s (shareholders) of a business are protected and entrusted appropriately. We, as agents, owe a duty of care to our clients and their entrusted wealth / investment in the firm that we work within and the profession that we represent ’ [applicable in the context of a public company, in particular]” Ethical Relativism “The theory that what is right is determined by what others are doing, and what a culture or society believes is acceptable – in other words, doing as others do in that place, business, context, situation and/or country – following accepted norms and/or habits and practices” GroupThink “What happens when pressure for unanimity within a highly cohesive group overwhelms its members’ desire or ability to appraise the situation realistically and consider alternative courses of action” Loophole “An ambiguity or inadequacy in the law or a set of rules, where someone who wants to take advantage of that law and misuse it, can do so by it’s manipulation, interpretation or adjustment of action to comply, however, not applying the law as it was intended, or within the spirit of how that law was intended. The law may have flexibility within application, may be outdated, ambiguous, poorly worded, or be subject to wide interpretation, or simply incorrectly applied with unethical intent” Spirit of the Law “Refers to how the law is being used and applied. If it is being applied in the lawful and ethical way that it was intended, then one is said to be acting within the spirit of the law (ethically). If, on the other hand, one is intentionally trying to find and use a loophole to misuse that law or not apply it as it was lawfully and ethically intended, then one is said to not be applying that law in the spirit that it was intended / enacted (unethically)” Profit versus Reputation?

“There will often be a contentious debate surrounding what is the top priority for a business. Is it to maintain profits, or protect reputation? The correct answer is that reputation needs to be the 1st priority, and maintaining profits a 2nd priority. Without reputation, a business maintaining profits alone will not be a sustainable and long-term successful business proposition. With a sound reputation, the opportunity to make healthy profits are then possible. However, if reputation is negatively impacted, then the opportunity to continue in business may be placed in jeopardy” *** Ethics Ethics deals with individual character and the moral rules that govern and limit our conduct. It investigates questions of right and wrong, duty and obligation, and moral responsibility. For example:  How should I live my life?  What sort of person should I strive to be?  What goals should I pursue?  What standards or principles should I live by? Ethics deals with: • individual character • moral rules that govern us • questions of right and wrong • fairness and unfairness • good and bad • duty and obligation • justice and injustice Business and Organisational Ethics • Business ethics is the study of what constitutes right and wrong, or good and bad, human conduct in a business context • An organisation is a group of people working together to achieve a common purpose • Organisations may or may not be profit-oriented Moral vs Non-Moral Standards • We can distinguish between actual and moral questions • When dealing with moral questions, we appeal to moral standards • These standards differ from other kinds of standards in that they concern behaviour that is of serious consequence to human welfare Moral Standards Moral behaviour can profoundly benefit people, and immoral behaviour can do harm. For instance:  Are products healthful or harmful?  Are work conditions safe or dangerous?  Are personnel procedures biased or fair?  Is privacy respected or invaded? Because these are matters that seriously affect human well-being, they are all explored in this subject Moral standards take priority over other standards

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‘Other standards’ include self-interest. Something that morality condemns cannot be justified on non-moral grounds of self-interest The soundness of moral standards depends upon the adequacy of the reasons or the quality of the arguments that support them

Morality • Morality differs from etiquette • Morality differs from the law • Morality differs from professional codes of ethics Morality and Etiquette Etiquette refers to acceptable behaviour within a society  Rules of etiquette are generally non-moral in character  But rules of etiquette can have moral implications The Nature of Morality

Defining the Law Statutes  Laws enacted by legislative bodies Regulations  Delegated legislation or laws enacted by authorised bodies Common law • Based on historical decisions that set precedents Constitutional law • Court rulings on the requirements of the Constitution Morality and the Law Complying with the law does not necessarily guarantee moral behaviour, just as breaking the law does not always result in immoral behaviour Acting immorally does not always result in illegal behaviour, just as acting morally does not necessarily guarantee the legality of an action Some philosophers believe that the illegality of an action makes it morally wrong, even if the action would normally be judged as morally acceptable • But nonconformity to law is not always immoral; there are circumstances in which breaching a law might be morally permissible An action can be illegal but morally right. For example: • helping a Jewish family in Nazi Germany • non-adherence to segregation laws in the US An action that is legal can be morally wrong. For example: • the failure of a person with knowledge of first aid to render assistance at the scene of an accident, when there is no valid reason not to help Laws codify a society’s customs, ideals, norms and moral values Laws are not sufficient to establish the moral standards to guide us • The law is too blunt an instrument to provide moral guidance • It provides a base from which to form our moral standards, but it does not encompass all possible breaches of moral conduct Morality and Professional Codes

Professional codes of conduct are rules designed to govern a given profession Professionals are understood to have agreed to be bound by these rules • Violation of a professional code may result in the disapproval of one’s peers or, in serious cases, loss of one’s licence to practise that profession

Acquiring Moral Standards • Our early upbringing • The behaviour of those around us • The moral standards of our culture • Our own experiences, and our critical reflections on those experiences • Can our principles withstand critical scrutiny? Religion Spirituality and Morality • Religion involves not only a formal system of worship, but also prescriptions for social relationships • There is a form of the ‘Golden Rule’ – ‘Do unto others as you would have them do unto you’ –in all of the world’s major religions • Religious ideals are general and difficult to translate into precise policies • Religious principles are accepted purely on the basis of faith; moral principles are accepted after careful rational analysis • Research indicates that spirituality has an impact on ethical ways of doing things • ‘While some believed that morality and religion or spirituality are intertwined, others considered that moral values and ethics are not necessarily derived from a particular religion or spirituality’ (p. 13) Ethical Relativism • ‘What is right is defined by what a society says is right.’ • Arguments that ‘might is right’ • No ethical progress • Undermines moral reasoning  What is right in one culture may be wrong in another Relativism and the ‘Game’ of Business ‘Business has its own moral standards, and it should only be judged by those standards’ • Any specialised activity has its own rules and standards, but the morality of those rules and standards should still be subject to evaluation • Business activity affects those who have not chosen to play the ‘game’ Moral Principles and Self Interest The moral standards of a society provide the basic guidelines for cooperative social existence Generally, following moral principles is in our best interests, particularly in a business context Organisational Norms A major characteristic of an organisation is its members’ shared acceptance of organisational rules Evidence suggests that many managers experience role conflicts between what is expected of them as efficient managers and as ethical persons Organisational pressures can lead to unethical behaviour

The need to meet corporate objectives, to be a team player, and to conform to organisational norms can lead otherwise honourable individuals to engage in unethical conduct Groupthink • Group members may have the illusion that the group is invulnerable, or that because the group is good or right, whatever it does is permissible Diffusion of responsibility  Responsibility for what an organisation does can become fragmented or diffused throughout the group, with no single individual seeing him- or herself as responsible for what happens  In any large group or organisation, diffusion of responsibility for its actions can lead individuals to feel anonymous and unaccountable for what happens •

Moral Reasoning In science, the scientific method tells us what steps to take if we seek to answer a scientific question, but there is no comparable moral method for engaging moral questions There is general agreement about what constitutes good moral reasoning Moral judgements should be logical  Judgements based on evidence and reason, not on emotion, sentiment or preference Moral reasoning should be based on facts  Judgements based on analysis of all relevant and accurate information Moral reasoning should be based on sound moral principles  Judgements based on considered beliefs rather than on ‘gut’ responses ***

Key Theories Shareholder Theory The key underpinning of this theory is as follows: • Primarily focuses just on the shareholders • The shareholders are the owners • The shareholders are referred to as the ‘principals’ • The principals of the business invest in shares in part ownership of the entity and receive dividends in the form of returns, generally based on a percentage of the profits and paid quarterly • A shareholder focus aligns directly with the profit generation and aligned to a ‘Profit is King’ mentality • The shareholder focus is important, but should not the only priority of a business • In the past, a purely shareholder focus was acceptable, but is now considered a narrow and short-term focus • Today, successful businesses should adopt a more stakeholder focus, which is deemed a broader approach to a more successful, holistic and long-term business strategy The key underpinning of this theory is as follows: • This theory primarily focuses on the wider stakeholder group • Stakeholders are anyone who can affect, or be affected by, an action or decision relating to the business / entity

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Examples of the wider stakeholder group include: shareholders, employees, customers, supplies, the government, the tax office, the community and the environment This is considered a much more desirable approach to long-term business success and is what all visionary sound businesses adopt today

Agency Theory The key underpinning of this theory is as follows: • An agent is a person authorised to act on behalf of another individual or entity • In the context of public companies / corporations, the agent refers to the employees, managers, CEO, CFO and the Board (executive directors) • Relates to the owner / worker relationship within an organisation • The owners are the principals and the workers are the agents • The owners (principals) and not generally the employees (agents) • There is separation between the two parties (SLE) Legitimacy Theory The key underpinning of this theory is as follows: • Legitimacy theory concentrates on the concept of a social contract, implying that a company's survival is dependent on the extent to which the company operates within the bounds and norms of society (Brown and Deegan, 1998) • In our context, legitimacy relates to the justification and existence of a business and its actions i.e. Organisational legitimacy • A ‘social contract’ with society is the informal expectation (not contractual nor written) that society places on business to be holistically responsible in their pursuit of generating profits • The greater the levels of legitimacy, the less scrutiny a business may come under, which may secure longer term success

Key Concepts A Vulnerable Profession • The accounting and financial services profession is a profession very vulnerable to the temptation of acting in self or private interest • We deal with other people’s money, much of it is electronically administered and handled, and the risk of greed can prevail, enhanced with increased opportunity • $$$ and profit driven organisations who value profit over reputation can nurture this dangerous temptation to compromise our ethical decision making What is the State of the Accounting Profession? • Due to the spate of corporate collapses, the accounting profession has lost a large degree of its reputation • The areas that have lost the most amount of reputation is the audit role / function and corporate governance • We are now in the process of rebuilding the reputation of our profession • Sceptics have argued that it may never regain the reputation it once had The Changing Accounting Profession

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Going back 30 years ago or so, the traditional role of the accountant focused primarily of fewer tasks, but we did them thoroughly, well and ethically. These fewer tasks were mainly tax and audit Now we have moved away from that role of providing just fewer expert tasks, and we are offering a full range of financial services, including the broad spectrum from bookkeeping, to prep of financials, to tax advice, business consulting, and tax. We refer to this wider range of services, as the ‘one stop shop’. Although convenient for the client, it poses a range of conflicts of interest, and threats such as self-review. This can reduce our level of independence and quality of service, if we are not careful. Now we offer what is commonly referred to as ‘the one stop shop’ of full financial services maybe to the detriment of our ongoing credibility If we are a ‘jack of all trades’, can we truly be experts of anything, and how can we be truly impartial?

What is meant by ‘the one stop shop’ • It means that we offer more than just the traditional role / service of just tax and audit. We offer the full range of financial services, which is convenient for the client, but can pose many conflicts of interest • Audit services = audit (less money to be made in that area) / traditional role • Non audit services = consulting + more (more money to be made in these areas) / contemporary role What is meant by ‘the balance of power’ between professional and client? • Based on the expertise of the professional, the client seeks that knowledge • The balance of power should be such that the professional is in ‘control’ and the client is being directed • This is the healthy balance of power • This relationship can be interrupted when the client tries to ‘control’ (or bully) the professional, where the client tries to place undue pressure on the professional to ‘do as client’ wants, and unfortunately undermines the ethical decision making of the professional e.g. The Enron, Arthur Andersen relationship which was toxic • It is not always ethical or appropriate to put client or employer needs first if you are being asked to do something unethical/ public interest and professionalism is far more important to uphold than satisfying a pushy client or employer Should we always put client first? • If clients are asking us to behave ethically and adhere to the law and uphold our professional duty, then it is fine to value client needs and adhere to their requests • If, however, clients are applying undue pressure and ‘bullying’ the professional to engage in comprising or unethical practices, then it is NOT acceptable to ‘put client first’ (public interest and the profession should come first instead) What is meant by ‘Profit is King’? • This is a short term and dangerous focus for a company. Successful companies need to focus on the long term vision • ‘Profit for King’ is a short term desire to drive profit up to its maximum, at whatever ethical cost. The dollar is the main driving force and motivator, e.g. Enron. • If a company has this focus, they may act recklessly, without concern for the impact of their short-term risky and ‘self-interest’ related practices and decision making. We

often use this term to describe all the firms that have faced corporate collapse or major corporate fraud scandals e.g. Enron, Arthur Andersen, WorldCom, NAB. etc. What is meant by ‘the tone is set from the top’ • Leadership style and behaviour is very influential, and it filters down to lower levels of an organisation • If leaders are ethical, an ethical culture is more likely to prevail • If leaders are unethical, then an unethical culture • Culture and behaviour does not flow upwards • Culture and behaviour flows downwards • We try and follow and please our leaders, hence mimicking the traits and values of those leaders What is meant by ‘window dressing’ and/or ‘rhetoric’? • This is a term often used when sceptically referring to the rationale behind an action, suggesting that it is ‘fake’ and without any true ethical intent or genuine effort / conviction to genuinely ‘do the right thing’ • An act of appearing on the surface as complying to a requirement, without any conviction to truly follow through / execute in practice an act or initiative • ‘on face value’ // aligned to the saying, ‘actions are louder than words’ • It is suggesting that it is merely an act of ‘ticking the box’ • It is often aligned to ethics topics surrounding Codes and CSR • It suggests that businesses and/or executives want to ‘appear’ as doing the right ethical action, however, are not truly committed to the cause • Designed to ‘create a positive impression or perception’ only (but no real follow through and not ‘walking the talk’) What laws in Australia govern us re business? What is the meaning of self-regulation? • Corporations Act // Taxation law // Clerp 9 (2004) • Ongoing development of corporate governance guidelines (some are legislated but not all) • (post the major US corporate collapses, the major act which was implemented was the Sarbanes Oxley Act, 2002, which brought about improvement to audit quality and increased the accountability of BODs / the Clerp 9 in Australia followed in 2004) • We are predominantly self regulated (laws and standards developed from within the profession, as opposed to be directed and enforced through government • This is a privilege of a profession. Professions want to maintain this right to selfregulate • Aligned to the right of professions to self-regulate • Other than these laws, the accounting profession is predominantly self-regulated, but retaining that is dependent on trust and behaviour Shareholder versus Stakeholder? The emphasis used to be on ‘shareholder’ focus alone • When the focus is just on shareholder focus, the risk is that company priority centres around profit generation too much, as this is where ethics can be compromised ... This is whe...