Ethics Final

Front 1

hypernorms

Back 1

values that are respected by most groups or cultures around the world

Front 2

what are the hypernorms

Back 2

honesty, compassion, predictability, fairness, integrity, responsibility

Front 3

hypernorm table statement

Back 3

hypernorm is a value that is almost universally respected by stakeholder groups. Therefore, if a company's activities respect a hyper norm, the company is likely to be respected by stakeholder groups and will encourage stakeholder support for the company activities.

Front 4

what are the determinants of corporate reputation

Back 4

credibility, reliability, responsibility, trustworthiness

Front 5

professional accountants have also shifted their audit approach to

Back 5

professional accountants have also shifted their audit approach to the examination of the risks facing a corporation, how the corporation has provided for these risks operationally, and how they have been accounted for in the records and financial reports.

Front 6

definition of risk

Back 6

the chance of something happening that will have an impact on objectives

Front 7

definition of risk management

Back 7

the culture, processes, and structures that are directed towards the effective management of potential opportunities and adverse effects

Front 8

definition of risk management porcess

Back 8

the systematic application of management policies, procedures, and practices to the tasks of establishing the context, identifying, analyzing, assessing, managing, monitoring, and communicating risk.

Front 9

ethics risk

Back 9

the risks of failing to meet the expectations of stakeholders

Front 10

ethics risk statement

Back 10

directors, executives, and professional accountants will find that meeting the expectations of stakeholders is increasingly important. This while involve delving into the values that determine a corporation's reputation, and managing those values so that potential risks are avoided and/or effectively mitigated. To ignore these ethics risks is to risk the fates evident in earlier corporate debacles.

Front 11

honesty ethics risk

Back 11

shareholders > stealing, misuse of funds or assets; performance level; reporting transparency, accuracy

Front 12

integrity ethics risk

Back 12

shareholders > stealing, misuse of funds or assets; reporting transparency, accuracy
customers > performance
environmentalists > pollution

Front 13

predictability ethics risk

Back 13

shareholders > conflict of interests with officers

Front 14

responsibility ethics risk

Back 14

shareholders > conflict of interests with officers; performance level
environmentalists > pollution

Front 15

fairness ethics risk

Back 15

employees > safety; diversity; child and/or sweatshop labor
customers > safety; performance

Front 16

compassion ethics risk

Back 16

employees > child and/or sweatshop labor

Front 17

shareholder expectations not met: shareholders: Stealing, misuse of funds or assets

Back 17

honesty, integrity

Front 18

shareholder expectations not met: shareholders: conflict of interests with officers

Back 18

predictability, responsibility

Front 19

shareholder expectations not met: shareholders: performance level

Back 19

responsibility, honesty

Front 20

shareholder expectations not met: shareholders: reporting transparency, accuracy

Back 20

honesty, integrity

Front 21

shareholder expectations not met: employees: safety

Back 21

fairness

Front 22

shareholder expectations not met: employees: diversity

Back 22

fairness

Front 23

shareholder expectations not met: employees: child and/or sweatshop labor

Back 23

compassion, fairness

Front 24

shareholder expectations not met: customers: safety

Back 24

fairness

Front 25

shareholder expectations not met: customers: performance

Back 25

fairness, integriy

Front 26

shareholder expectations not met: environmentalists: pollution

Back 26

integrity, responsibility

Front 27

corporate reports frequently lack integrity because

Back 27

they do not cover some issues

Front 28

sometimes issues will be mentioned, but in such an obtuse or unclear manner that the lack of __________ will cloud the understanding of the reader

Back 28

transparency

Front 29

__________, or faithful representation, is, of course, fundamental to an understanding of the underlying facts

Back 29

accuracy

Front 30

the philosopher that argues that the goal of life is happiness, and happiness is achieved by leading a virtuous life in accordance with reason

Back 30

Aristotle

Front 31

the philosopher that argued that people are ethical when they do not use other people opportunistically and when they do not act in a hypocritical manner demanding a high level of conduct for everyone else, while making exceptions for themselves

Back 31

Immanuel Kant

Front 32

the philosopher that argues that the goal of life is to maximize happiness and/or to minimize unhappiness or pain, and the goal of society is to maximize the net social benefits to all people

Back 32

John Stuart Mill

Front 33

the philosopher that argues that society should be structured so that there is a fair distribution of rights and benefits, and that any inequalities should be to everyone's advantage

Back 33

John Rawls

Front 34

corporate social contract

Back 34

profits are to be generated, but not at any cost to society and preferably in a way that supports society. evolving relationship between corporations and society

Front 35

consequentialism

Back 35

requires that an ethical decision have good consequences

Front 36

deontology

Back 36

holds that an ethical act depends upon the duty, rights and justice invovled

Front 37

virtue ethics

Back 37

considers an act ethical if it demonstrates the virtues expected by stakeholders of the participants

Front 38

modified 5 questions approach

Back 38

involves challenging any proposed policy or action with 5 questions designed to rate the proposal on the following scales: profitability, legality, fairness, impact on the rights of each individual stakeholder and on the environment specifically, as well as the demonstration of virtues expected by stakeholders

Front 39

modified moral standards appraoch

Back 39

focuses on 4 dimensions of the proposed action. 1. whether it provides a net benefit to society 2. whether it is fair to all stakeholders 3. whether it is right 4. whether i demonstrates the virtues expected by stakeholders; less company centered and is better suited to the evaluation of decisions in which the impact on stakeholders outside the corporation is likely to be very severe

Front 40

modified pastin approach

Back 40

extends the MSA by taking specific account of the culture within the corporation and so called common problems. any decision be evaluated in comparison to the company's ground rules (ground rule ethics); the net benefit it produces (end point ethics); whether it impinges on any stakeholder's rights and requires rules to resolve the conflict (rule ethics); and whether it abuses rights apparently belonging to everyone (problems of the commons); quite practical and is best suited to decisions with impacts primarily on stakeholders directly attached to the corporation such as employees or customers

Front 41

Enron

Back 41

the BOD failed to provide the oversight needed to prevent the largest bankruptcy in American history, at the time

Front 42

Arthur Andersen

Back 42

as a result of shifting its focus from providing audit services to selling high-profit margin consulting services, AA lost its perceived independence when conducting the Enron audit

Front 43

Worldcom

Back 43

at $11 billion it eclipsed the $2.6 billion Enron fraud. There was no one in the organization to challenge and question the authority of Bernard Ebbers, CEO of Worldcom

Front 44

SOX

Back 44

as a result of the business, audit, and corporate governance failures, the US government passed SOX in 2002 to enhance corporate accountability and responsibility

Front 45

Tax Shelters

Back 45

EY and KPMG were no longer protecting the public interest when they began to sell highly lucrative tax shelters to the super-rich. The government was so incensed with their egregious behavior that the firms were fined and Circular 230 was issued

Front 46

Circular 230

Back 46

in 2007, the IRS imposed new professional standards on tax preparers and tax advisors

Front 47

Subprime Mortgage Meltdown

Back 47

there was a lot of money to be made in speculating on mortgage-backed securities. But the risks had not been carefully assessed and so, when the US housing market collapsed in 2008, the value of the associated securities fell, and governments around the world had to provide bailouts to avert a global financial crisis

Front 48

Dodd-Frank Wall Street Reform and Consumer Protection Act

Back 48

in July 2010, as a result of the subprime mortgage crisis, the US Congress enacted new regulations over the financial services marketplace n order to provide enhanced consumer protection

Front 49

Bernard Madoff

Back 49

in 2009 he was sent to prison for cheating investors out of billions of dollars. Investors should remember that if they are offered returns that are too good to be true, they probably are

Front 50

key results of Securities Act of 1933

Back 50

-created the SEC
-required companies raising money from the public in the US to register with the SEC and follow its regulations governing the original issue of some corporate securities, investor information, audit certification by an independent accountant, and civil liability for the issuer and underwriters

Front 51

key results of the Securities Act of 1934

Back 51

created regulatory framework for the secondary trading (on stock exchanges) of securities (stocks, bonds, and debentures)

Front 52

key results of the Glass-Steagall Act of 1933

Back 52

aka the Banking Act of 1933; mandating banking reforms designed to separate investment and commercial banking functions to safeguard against commercial bank failures from speculative investment mistakes

Front 53

key results of the Investment Advisors Act of 1940

Back 53

created a framework for registration and regulation of investment advisers

Front 54

Gramm-Leach-Bliley Act

Back 54

repeal of the Glass-Steagall Act in 1999 by this act contributed directly - but not solely - to the Subprime Lending Crisis of 2008 that once again devastated economies of the world. This has led to the new international banking regulations of 2010.
--removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. With the passage of the Gramm–Leach–Bliley Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate.

Front 55

Dodd Frank Wall Street Reform and Consumer Protection Act of 2010

Back 55

Passed as a response to the late-2000s recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression.[2][3][4] It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation's financial services industry.[5][6]

Front 56

Enron

Back 56

-sold natural gas but got in the business of selling futures contracts
-began to record income using an estimate of future sales
-called "prepays," Enron would record revenue in the current period, when the cash was received, in advance of delivering the natural gas over a period of years in the future
-would sell life-long assets such as capital-intensive energy projects, but had trouble, so set up SPEs to invest in them
-SPEs were not independent of Enron, notional "outside investors" were Enron employees - sold assets to itself
-overstated revenue understated liabilities
-11/19/01 announced it couldn't meet its next debt payment
-12/2/01 declared bankruptcy
-almost one half of its reported profits were false
-according to both internal and external investigations the failure was attributed to the failure of the BOD to provide oversight and governance: Board allowed::
*high risk accounting transactions "prepays"
*management had inappropriate conflicts of interests
*didn't record off the book liabilities though SPEs
*excessive compensation to senior executives without approval
-BOD engaged in financial transactions with Enron
-BOD failed to ensure AA independence
-ignored whistleblowers

Front 57

Arthur Andersen

Back 57

-1980s culture changed: revenue generation became key to promotion, structure transactions to be disclosed in ways favorable to management, pressure to reduce audit costs, audit partners were allowed to override the rulings of quality control partners
-potential conflict of interest between fair reporting to shareholders and servings management's interest was not addressed
-provided both audit and consulting services, more consulting revenue than audit
-PIC did not challenge Enron acct policies, ignored QC partner
-SEC investigated AA for audit deficiencies
-destroyed important documents

Front 58

Worlcom

Back 58

-long distance discount service
-growth through takeovers
-planned takeover of Sprint was vetoed by US and European regulators which put downward pressure on stock which had been propped up by using takeovers rather than normal operating growth to increase earnings
-capitalized expenses to artificially increase net income: rather than recording an expense for third-party line costs, it recorded the costs as assets
-fraud perpetrated by CEO Ebbers, CFO Scott Sullivan who each received huge retention bonuses
-ficticious reserves of 2 billion
-senior executives were overcompensated and held too many stock options so they had strong motivation to keep the stock price strong
-insufficient oversight, power concentrated in hands of one person

Front 59

crisis of confidence

Back 59

-prior to Enron, AA, and Worldcom investors and regulators were concerned about the lack of integrity of business leaders
-there were obvious flaws in the governance structures designed to ensure that management was not operating the business to further their own personal self-interests

Front 60

SOX responsibility of management

Back 60

-implement a proper internal control system to ensure that the company's financial reports are accurate, complete, understandable, and transparent
-quarterly and annual financial reports must include a management certification (signed by CEO and CFO), attesting to the scope, adequacy, and effectiveness of the company's internal controls concerning financial reporting

Front 61

SOX how to reduce conflicts of interest

Back 61

-disclosure of management stock trades and any dealings that management has with major investors
-requirement that all publicly traded companies have a corporate code of ethics

Front 62

SOX responsibilities of auditors and the audit committee

Back 62

-directors who sit on audit committee (AC) independent of management
-AC have at least one member who is a financial expert, and the others must be financially literate
-AC must have a sufficient budget of time and money to complete its work
-the auditor reports to the AC without management being present
-the auditor doesn't provide any management services, other than tax and information technology, to its audit clients

Front 63

PCAOB

Back 63

-established by SOX
-audits the auditors
-5 members appointed by the SEC
-charged with establishing auditing and attestation standards
-inspecting and disciplining accounting firms

Front 64

Key corporate governance controls that were established or strengthened by SOX

Back 64

-independence of BOD from management
-non-arm's length transactions
-stock options had been too generously granted
*SOX ensures greater transparency which should minimize the possible adverse effects of conflicts of interests
**audit committee is key governance control - oversees financial reports and reporting system
*SOX forced directors (esp those that are also AC members) to realize that they can't take the assertions of mgt at face value
-directors have the ultimate responsibility to oversee management and to set strategic policy
*auditors are now acquiring greater knowledge of their clients' internal control systems

Front 65

main cause of the subprime mortgage crisis

Back 65

-greed
-commercial banks used to borrow money from depositors and lend it to homeowners secured by a mortgage
-investment banks assisted corporations in the raising of capital funds through underwriting, mergers & acquisitions, and trading in financial instruments
-the repeal of the Glass Steagall act allowed Commercial banks to engage in investing activities such as borrowing money at a low rate by issuing short to medium term commercial paper and then lending that money through mortgage investments at higher interest rates (structured investment vehicles)
-SIVs permitted banks to earn money through the spread between the 2 interest rates
-banks then issued CDOs (type of SIV - bond secured by portfolio of mortgages) and securitized them
-cash receipts from mortgagors were used to pay the interest of the CDO - riskiness of CDO came from riskiness of mortgages
-a credit default swap (CDS) permits an investor who buys a security (like CDO) to contract with a 3rd party to buy protection in the event the issuer of the security defaults on the contract (insurance policy - hedge against risk of default but dissimilar in that anyone can buy a CDS even if the purchaser of the CDS does not own the underlying security)
-housing prices were climbing, banks were encouraging anyone and everyone to buy a house
-securitization permitted financial institutions to issue mortgages to homeowners, and then sell those mortgages to an investor which generated cash to make more mortgage loans and would also collect more transaction fees
-houses were now investments rather than homes
-credit rating agencies were classifying high risk SIVs and CDOs as low risk
-in '06 housing prices began to fall, values of mortgages exceeded values of properties, homeowners began to default, banks were foreclosing and selling off houses fast depressing market further
-value of CDOs dropped and because a CDS is derivative instrument whose value is a function of corresponding CDO, CDS values decreased too

Front 66

tranches

Back 66

different risk classes that were contained by large CDO bond offerings; interest and principal payments to CDO holders were made in order of seniority - senior tranches were safest, junior tranches were the riskiest and paid a higher coupon rate

Front 67

Dodd Frank

Back 67

overall objective is to provide financial stability and increased consumer protection by imposing more regulation on the investment marketplace, including the following:
-new federal agencies created to identify the risks associated with complex financial instruments such as mortgages, credit cards, and other financial products
-new regulations concerning risky financial products such as financial derivatives
-tighter rules over the activities of financial intermediaries, such as mortgage brokers, hedge funds, and credit rating agencies
-the US government is no longer allowed to bail out financially troubled organizations
-shareholders now have a greater say on the levels of executive compensation

Front 68

signs of ethical collapse

Back 68

1. pressure to meet goals, especially financial ones, at any cost
2. a culture that does not foster open and candid conversation and discussion
3. a CEO who is surrounded with people who will agree and flatter the CEO, as well as a CEO whose reputation is beyond criticism
4. weak boards that do not exercise their fiduciary responsibilities with diligence
5. an organization that promotes people on the basis of nepotism and favoritism
6. hubris - the arrogant belief that rules are for other people, but not for us
7. a flawed cost/benefit attitude that suggests that poor ethical behavior in one area can be offset by good ethical behavior in another area

Front 69

what was the Enron Powers Report?

Back 69

-The Powers Report was prepared by a 3 person subcommittee of the Enron board chaired by William Powers, Jr. who joined the board in September 2001 and resigned in February 2002. The subcommittee was appointed on 10/26/02 with the mandate to investigate related-party transactions that had surprised the board and resulted in several restatements of issued financial statements and reports

Front 70

What was the Enron Senate Subcommittee Report

Back 70

The Senate Permanent Subcommittee on Investigations released its "Report on the Role of the Board of Directors in the Collapse of Enron" on July 8, 2002 - "Based upon the evidence before it, including over one million pages of subpoenaed documents, interviews of thirteen Enron Board members, and the Subcommittee hearing on 5/7/02, the US Senate Permanent Subcommittee on Investigations makes the following findings with respect to the role of the Enron BOD in Enron's collapse and bankruptcy:" 1. Fiduciary Failure - failed to safeguard shareholders by allowing Enron to engage in high risk accounting, inappropriate conflict of interests, extensive off the books activities, excessive executive compensation, ignored questionable management practices
2. high risk accounting
3. inappropriate conflicts of interests - inadequate oversight for SPEs
4. Extensive undisclosed off the books activities - knowingly failed to ensure adequate public disclosure
5. excessive compensation - failed to monitor cumulative cash drain
6. lack of independence- financial ties between company and board members; didn't ensure independence of auditor

-recommendations of SSR - 1. strengthen oversight of directors 2. strengthen independence of directors, AC, and auditors

Front 71

what was the role of Enron's BOD?

Back 71

-reviewing the company's overall business strategy, selecting and compensating the company's senior executives, evaluating the company's outside auditor, overseeing the company's financial statements, monitoring overall company performance; "paramount duty" to safeguard the interest of the the company's shareholders
-state laws duties: obedience, loyalty, and due care to shareholders

Front 72

business judgment rule

Back 72

legal doctrine in most states that directors operate under which provides directors with broad discretion, absent evidence of fraud, gross negligence, or other misconduct, to make good faith business decisions

Front 73

what could SPEs be used unethically and illegally to do?

Back 73

-overstate revenue and profits
-raise cash and hide the related debt or obligations to repay
-offset losses in Enron's stock investments in other companies
-circumvent accounting rules for valuation of Enron's treasury shares
-improperly enrich several participating executives
-manipulate Enron's stock price thus misleading investors and enriching Enron executives who held stock options

Front 74

who was the Enron whistleblower?

Back 74

Sherron Watkins - anonymous letter
-competent professional accountant that had worked for AA for many years before joining Enron

Front 75

Why did Worldcom fail

Back 75

Worldcom failed because of bad business judgements that were hidden from investors by accounting manipulations (that involved very basic easy to spot types of fraud) and executive skullduggery

Front 76

who was the Worldcom whistleblower

Back 76

cynthia cooper - VP of Internal Audit

Front 77

what is moral imagination

Back 77

creativity and innovation in the solutions managers come up with to solve practical business problems
-managers should use moral imagination to determine win-win ethical alternatives - decisions need to be good for the individual, good for the firm, and good for society

Front 78

what are the 4 major ethical theories

Back 78

1. Teleology - utilitarianism & consequentialism
2. Deontological Ethics - Motivation for Behavior
3. Justice & Fairness - Examining the Balance
4. Virtue Ethics

Front 79

Teleology

Back 79

-derived from Greek work telos - which means ends, consequences, and results
-teleological theories study ethical behavior in terms of the results or consequences of ethical decisions
-ethical decisions are right or wrong as they lead to positive or negative outcomes
-clearest articulation in utilitarianism
-hedonism focuses on the individual and seeks the greatest amount of personal pleasure or happiness
-utilitarianism measures pleasure and pain at the societal level

Front 80

utilitarianism

Back 80

-part of teleology
-defines good and evil in terms of non-ethical consequences of pleasure and pain
-ethical decision is the one that creates the greatest amount of pleasure and the least amount of pain
-measures pleasure and pain at the society level, does not focus on the decision maker
-key aspects: ethicality is assessed on the basis of non-ethical consequences; ethical decisions should be oriented towards increasing happiness and reducing pain; happiness and pain can relate to all of society and not just the decision maker; ethical decision maker must be impartial and not give extra weight to personal feelings
-NOT means & ends
-ignores motivations, focuses on consequences

Front 81

act utilitarianism

Back 81

=consequentalism
-deems an action to be ethically good or correct if it will probably produce a greater balance of good over evil
-arithmetic

Front 82

rule utilitarianism

Back 82

we should follow the rule that will probably produce a greater balance of good over evil and avoid the one that will not
-human decision making is guided by rules

Front 83

deontological ethics

Back 83

-motivations for behaviors
-evaluates the ethicality of behavior based on the motivation of the decision maker
-an action can be ethically correct even if it doesn't produce a net balance of good over evil for the decision maker or society as a whole
-Kant - ethical behavior is judged by a standard of duty - moral worth exists only when a person acts from a sense of duty
-Kant 2 laws for assessing ethicality - categorical imperative and practical imperative
-weaknesses - categorical imperative does not provide clear guidance when moral laws conflict and only one can be followed and sets a high standard that is difficult to follow

Front 84

categorical imperative

Back 84

-law developed by Kant in assessing ethicality
-part of deontology
-"I ought never to act except in such a way that I can also will that my maxim should become a universal law."
-supreme principle of morality
-you should only act in such a way that you would be prepared to have anyone else that is in a similar situation act in the same way
-it is imperative because it must be obeyed and it is categorical because it is unconditional and absolute

Front 85

practical imperative

Back 85

-law developed by Kant in assessing ethicality
-part of deontology
-"act in a way that you always treat humanity, whether in your own person or in the person of any other, never simply as a means, but always at the same time as an end."
-owner/slave didn't treat slaves as an end, only a means

Front 86

justice and fairness

Back 86

-David Hume argued that the need for justice occurs for 2 reasons - people are not always beneficent and there are scarce resources
-society was formed through self interest and since people are not self sufficient they have to cooperate with others for mutual survival and prosperity
-because of a limited number of resources and some benefit more than others there needs to be a mechanism for fairly allocating benefits and burdens - justice
-presupposes that people have legitimate claims on scarce resources and that they can explain or justify their claims
-the meaning of justice - to render or allocate benefits and burdens based on rational reasons
-2 aspects of justice: procedural justice (the process for determining the allocation) and distributive justice (the actual allocations)

Front 87

procedural justice

Back 87

-how justice is administered
-key aspects of a just legal system are that the procedures are fair and transparent - everyone is treated equally before the law and rules are impartially applied

Front 88

distributive justice

Back 88

-if individuals are equal they should be treated equally
-if they are not equal, they should not be treated equally (entry level staff paid less than partner)
-3 main criteria for determining the just distribution: need, arithmetic equality, and merit
-tax systems are based on need - the rich than can afford to pay are taxes so that funds can be distributed to less fortunate
-arithmetic equality - when cutting a cake make sure the person cutting the cake gets the last piece; violated when 2 class of shares have equal (dividend) cash flow rights but unequal voting rights
-merit - if one individual contributes more to a project then that individual should receive a greater proportion of the benefits - shareholders that own more shares receive more benefits

Front 89

virtue ethics

Back 89

goal of life is happiness of the soul (not hedonistic)
-we fulfill our goals of being happy by living a virtuous life in accordance with reason
-virtue is a character of the soul that is demonstrated only in voluntary actions
-we become virtuous by regularly performing virtuous acts - there is a need for ethical education so people will know what acts are virtuous
-arrange human characteristics in triads with the virtue situated between two extreme vices (courage is the virtue between cowardice and rashness; temperance is the virtue between self-indulgence and insensibility)
-other virtues = pride, ambition, good temper, friendliness, truthfulness, ready wit, shame, and justice
-focus on the moral character of the decision maker rather than the consequences of the action (utilitarianism) or the motivation of the decision maker (deontology)
-more holistic approach to understanding human ethical behavior
-focuses on the whole person who has a combination of virtues and avoids dichotomies
-an executive can only represent personal values or corporate values, not both
-advantage is that it takes a broader view recognizing that the decision maker has a variety of character traits
-problems: what are the virtues that businesspeople should have, and how is virtue demonstrated in the workplace?

Front 90

ethical decision making framework

Back 90

-a practical, comprehensive, multifaceted framework for ethical decision making developed in response to the need for ethically defensible decisions
-incorporates traditional requirements for profitability and legality, requirements shown to be philosophically important, and those recently demanded by stakeholders
-designed to enhance ethical reasoning by providing: insights into the identification and analysis of key issues to be considered and questions or challenges to be raised and approaches to combining and applying decision-relevant factors into practical action
-EDM proposes that decisions or actions be compared against 4 standards for a comprehensive assessment of ethical behavior:
1. consequences of well-offness created in terms of net benefit or cost [consequentialism/utilitarianism/teleology]
2. rights and duties affected/respect for the rights of stakeholders [deontology]
3. fairness involved [justice]
4. motivation or virtues expected [virtue ethics]

-the philosophical approaches provide the basis for useful practical decision approaches and aids

Front 91

sniff tests and rules of them

Back 91

-quick test that can be used to assess the ethicality of decisions on a preliminary basis
-check a proposed decision in a quick, preliminary manner to see if an additional full-blown ethical analysis is required
-Would I want it on the front page of a national newspaper?
-Will I be proud of the decision?
-Will my mother be proud?
-Is it in accordance with corporation's mission and code?
-Does it feel right?
-golden rule, disclosure rule, intuition ethic, categorical imperative (adopted by everyone else), professional ethic (explained to peers), utilitarian principle (greatest good), virtue principle (demonstrates virtues expected)
-rarely by themselves a comprehensive examination of the decision and leave the individuals and corporation involved vulnerable to making an unethical decision

Front 92

Stakeholder Impact analysis - fundamental stakeholder interests

Back 92

1. interests should be better off as a result of the decision (well offness - consequentalism)
2. decision results in fair distribution of benefits (fairness - deontology and virtue ethics)
3. decision should not offend any of the rights of ay stakeholder including the decision maker (right - deontology and virtue ethics)
4. resulting behavior should demonstrate duties owed as virtuously as expected (virtuosity -deontology and virtue ethics)

Front 93

stakeholders and their interests are evaluated on three dimensions:

Back 93

1. legitimacy - legal and/or moral right to influence the organization
2. power to influence the organization through the media, government or other means
3. perceived and real urgency of the issues arising

-claims involving all of these are most important

-choosing the most useful approach depends on whether decision impacts are short rather than long run, involve externalities and/or probabilities, or take place within a corporate setting.

Front 94

externalities

Back 94

impacts of corporate decisions and activities that are not included in the determination of the profit of the company that caused the impact (cleanup costs)

Front 95

traditional 5 question approach

Back 95

1. profitable? shareholders short term
2. legal? society at large
3. fair? fairness for all
4. right? rights of all
5. going to further sustainable development? specific rights

-traditional does not specifically incorporate a thorough view of the motivation for the decisions involved, or the virtues or character traits expected

Front 96

traditional moral standards approach

Back 96

builds directly on 3 of the fundamental interests of stakeholders, more general than 5 question, broader net benefit, suited to decisions with significant impacts outside the corporation (not like 5 question)
-utilitarian, individual rights, justice

-doesn't thoroughly review motivation or virtues

Front 97

traditional pastin

Back 97

4 key aspects of ethics
-reverse engineering to see through past actions what their values are
1. ground rule ethics - illuminate an individual or organization's rules and values
2. end point ethics - greatest net good for all
3. rule ethics - determine boundaries a person should take into account according to ethical principles
4. social contract ethics - how to move the boundaries to remove concerns or conflicts

doesn't look at motivation or virtues

Front 98

difference between tradition and modified approaches

Back 98

-traditional approaches don't consider motivation, virtues expected and character traits expected; these must be added to the traditional approaches to develop the modified approaches

Front 99

common pitfalls

Back 99

1. conforming to an unethical corporate culture
2. misinterpreting public expectations
3. focusing on short term profit and shareholder only impacts
4. focusing only on legalities
5. limits to faitness
6. limits to rights canvassed
7. conflicts of interest
8. interconnectedness of stakeholders
9. failure to identify all stakeholder groups
10. leaving out well-offness, fairness or rights
11. failure to consider the motivation for the decision
12. failure to consider the virtues that are expected to be demonstrated

Front 100

Summary of steps in making an ethical decision

Back 100

1. determine the facts - who what when where and how
2. define the ethical issues
3. identify major principles, rules and values
4. specify the alternatives
5. compare values and alternatives, and see if a clear decision emerges
6. assess the consequences
7. make your decision

Front 101

corporate accountability to shareholders and stakeholders

Back 101

corporations are legally accountable to shareholders and strategically accountable to stakeholders

Front 102

Threats to good governance

Back 102

-misunderstanding objectives and fiduciary duty
-failure to identify and manage ethics risks
-conflict of interests

Front 103

How should firms manage conflicts of interest?

Back 103

1. avoidance - preferred if appearance of having a COI can be avoided as well as the reality
2. disclosure to those stakeholders relying on the decision
3. management of the conflict of interest so that the benefits of the judgment made outweigh the costs

*first step in managing is to ensure that all employees are aware of their existence and consequences through codes of conduct and related training - cover slippery slop problem in training
*second step to create an understanding of the reasons - why the employer cannot afford unmanaged COI situations and why guidelines have been developed to prevent their occurrence

Front 104

sources of ethical guidance

Back 104

-codes of conduct or ethics of their professional body and of their firm or employer rank as important
-standard setters - IFAC, PCAOB, FASB, IASB
*GAAP
*GAAS (auditing
-commonly understood standards of practice
-research studies and articles
-regulator's guidelines - SEC, PCAOB, OSC, NYSE
-court decisions
-codes of conduct from employer, local professional bodies, international federation of accountants

Front 105

Fundamental principles in codes of conduct for professional accountants

Back 105

members should:
-act in the public interest
-at all times maintaing the good reputation of the profession and its ability to serve the public interest
-perform with
*integrity
*objectivity and independence
*professional competence, due care, and professional skepticism
*confidentiality
-not be associated with any misleading information or misrepresentation

Front 106

Main rule areas of the Code of Professional Conduct of the AICPA

Back 106

a. Independence
b. integrity and objectivity
c. confidential client
d. contingent fees
e. discreditable acts
f. commissions and referral fees

Front 107

company objectives areas of impact:

Back 107

-reputation,
-assets, revenues, costs
-performance
-stakeholders

Front 108

company objectives sources of risks

Back 108

environmental, strategic (IIA), operational (IIA), informational, financial (IIA - not aicpa)

Front 109

company objectives specific hazards or perils

Back 109

lawsuits (IIA/not aicpa), fire, theft, earthquakes and natural disasters (IIA)

Front 110

company objectives degree of control over the risk

Back 110

little, some, great

Front 111

documentation of company objectives

Back 111

aicpa/cica

Front 112

corporate social responsibility

Back 112

refers to the degree to which an organization takes the interests of stakeholders into account, and takes actions which respect those interests

Front 113

initiatives of the Dodd Frank act

Back 113

-consumer protections with authority and independence (new watchdog)
-ends too big to fail bailouts
-advance warning system (council to identify and address systemic risks)
-transparency and accountability for exotic instruments (eliminates loopholes that allow risky and abusive practices to go unnoticed and unregulated)
-executive compensation and corporate governance (shareholders with a say on pay)
-protects investors (tough new rules for transparency and accountability for credit rating agencies)
-enforces regulations on the books (strengthens oversight and empowers regulators to aggressively pursue financial fraud)

Front 114

ethics issues of subprime lending fiasco

Back 114

greed, incompetence, dishonesty, conflicts of interest, non-transparency, lack of moral courage, poor risk management

Front 115

ethics lessons of subprime lending fiasco

Back 115

-actions should be based on realistic expectations and responsible behavior
-full risk assessment, due diligence, and virtues are expected - investors must always consider fully the risks
-ethics risks including conflicts of interests are ever present and require constant vigilance especially in boom times
-acting within existing laws may not be a good idea
-insufficient consideration was given to the virtues expected by executives and firms in the lending market
-risk management assessment of subprime lending techniques failed to consider the fundamental unfairness involved for the mortgagees, investors, and the public
-unsuspecting have the right to transparent disclosure of the risks involve in corporate activities
-compensation schemes should be based on a balance between financial incentives and financial and ethical considerations and risks
-moral courage to speak up against unethical acts
-corporate governance systems have again proved to be inadequate to contain self interest and short term thinking and to focus on the medium and longer term with the view to producing lasting value for the public