chapter 4

A FRAMEWORK OF RULES MANAGEMENT ACCOUNTABILITY THE ETHICAL ENVIRONMENT ETHICS IN ORGANISATIONS ACCOUNTANTS AND ETHICS

Organisations are embedded in society and must respond to public concerns about ethical behaviour and social responsibility. Ethics are particularly relevant to accountants and the ACCA has its own ethical code for members.

ETHICAL CONSIDERATIONS

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A FRAMEWORK OF RULES

These are the main sources of rules that regulate behaviour of individuals and businesses.

A framework of rules

Management accountability

The ethical environment

Ethics in organisations

Accountants and ethics

Behaviour in society is required by the law, rules and regulations, and ethics.

Applies to individuals and organisations

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Context
Individuals and businesses do not operate in a vacuum. They both operate within a society. For society to operate successfully there must be guidelines for behaviour. These guidelines originate from a number of different sources. Although some behaviour is guided by the law, much of our behaviour comes from non-legal rules and regulations. Ethical behaviour is seen as the highest level of behaviour that society expects. This is where behaviour goes further than just meeting the legal and non-legal obligations.

Key learning points

There are three main sources of rules that regulate behaviour of individuals and businesses. These are: The law Non-legal rules and regulations Ethics

Topic tip
To reinforce the concept that much of the behaviour of both individuals and businesses is driven not by legal rules and regulations but by non-legal rules and regulations and ethics, ask students to consider the following exercise. Step 1: Identify the typical behaviour of a student on the way to this lecture. Step 2: Match the rules for behaviour with one of the main sources of rules and regulations. Examples might be: Paying for a bus ticket - The law Not distracting the driver - Non-legal rules and regulations Giving up a seat for the elderly / pregnant - Ethics

Learning example 4.1

The _______ is the minimum level of behaviour required. Any standard of behaviour below it is considered illegal and warrants punishment by society. Which of the following correctly completes the sentence above? A B C Law Regulatory obligation Ethical standard

Solution 4.1
A The law is the minimum level of behaviour required. Any standard of behaviour below it is considered illegal and punishable by society.

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MANAGEMENT ACCOUNTABILITY

Organisations are not autonomous they exist to serve some external purpose.

There can often be a conflict between managers' interests and other stakeholders' interests.

A framework of rules

Management accountability

The ethical environment

Ethics in organisations

Accountants and ethics

An organisations managers are collectively responsible for the conduct of an organisations affairs: they have a FIDUCIARY RESPONSIBILITY (duty of faithful service). How far do external pressures modify business objectives?

Stakeholder view:

A business depends upon appropriate relationships with all groups who have an interest in what the organisation does. Each stakeholder group has its own objectives so that a compromise is required.

Consensus theory:

Objectives emerge as a consensus of the differing views of shareholders, managers, employees, customers, suppliers and society at large but they are not all selected or controlled by management.

The stakeholder view recognises that the interests of people other than the owners of a business should be met.

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Context
At the start of this chapter the origins of rules and regulations were investigated. The story now moves on to examine the behaviour and accountability of managers within an organisation. An organisations managers are collectively responsible for the conduct of its affairs. This is true whatever the nature of the organisation, whether it is a charity or a commercial enterprise, a government or a trade union.

Key learning points

Organisations exist to serve some external purpose or group e.g. shareholders. The strategic apex (e.g. senior managers) are accountable to these groups. All managers have a duty of faithful service to the external purpose of the organisation. This is called the fiduciary responsibility. The stakeholder view of company objectives is that many groups of people have a stake or legitimate interest in what the company does. The consensus theory of company objectives states that objectives emerge as the consensus of the differing views of shareholders, managers, employees, suppliers, customers and society at large but (unlike the stakeholder view) they are not all selected or controlled by management.

Learning example 4.2

Who developed the consensus theory of company objectives? A B C D Porter Cyert and March Greenbury and Hampel Dalton and Sims

Learning example 4.3

Managers need not be actually corrupt in order to fail in their fiduciary duty. It is this statement true or false? A B True False

Solution 4.2
B Cyert and March developed the consensus theory of company objectives

Solution 4.3
A True. Managers need not be actually corrupt in order to fail in their fiduciary duty. The CEO who sets in motion a takeover bid that will enhance her prestige; the head of department who empire builds; and the IT manager who buys an unnecessarily sophisticated enterprise resource management system are all failing in their fiduciary duty even though they receive no material benefit themselves.

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THE ETHICAL ENVIRONMENT

Adverse effect of social responsibility action: additional costs reduced revenue if not supply some customers diversion of effort diversion of funds

Ethics and morality are about right and wrong behaviour

A framework of rules

Management accountability

The ethical environment

Ethics in organisations

Accountants and ethics

Ethics can be regarded as a set of moral principles to guide behaviour, based upon concepts of DUTY and CONSEQUENCES absolute moral rules outcomes: the end justifies the means

2 3

Other considerations are based upon RIGHTS to be respected, and VIRTUES to be cultivated: firmness, fairness, objectivity, charity, forethought, loyalty ... SOCIAL ATTITUDES are also significant: work/life balance; green concerns; minorities Translated into business objectives:
Employees Minimum wage Job security/ satisfaction Working conditions Customers Suppliers Society

Product quality Pricing Safety

Regular orders Timely payment

Pollution control Sustainability Charity work Product quality

Contrast this with the political environment: laws regulations government agencies

Ethical problems facing managers: extortion bribery grease money gifts

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Context
The decisions and behaviours of individuals and businesses will depend upon more than just rules and regulations. Their actions will also depend upon the ethical environment. Ethics is about making the right decisions and doing the right things.

Key learning points

The certainty of legal rules does not exist in ethical theory. Utilitarianism (Jeremy Bentham) is choosing the action that is likely to result in the greatest good for the greatest number of people. Deontology is the study of duty. Kant argued that behaviour should be governed by absolute moral rules. Social attitudes, such as a belief in the merits of education, progress through science and technology, and fair competition, are significant for the management of a business organisation.

Topic tip
To set ethics in context and anchor some of the concepts in real life ask the students to consider the following: Many organisations exceed their statutory obligation to their employees. List the ways in which an organisation might do this. Examples might include: paying wages in excess of the market wage, job security, good working conditions.

Learning example 4.4

Businesses are widely regarded as having a duty to safeguard the natural environment. Identify four potential areas for action for a business.

Learning example 4.5

Duty is used as a label on the ethical approach technically called which of the following? A B C D Deontology Etymology Acarology Molinology

The solutions to Examples 4.4 and 4.5 are provided in the Answer Bank.

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ETHICS IN ORGANISATIONS

Compliance-based conformity with the law

Integrity-based incorporates ethics into organisation's value and culture

A framework of rules

Management accountability

The ethical environment

Ethics in organisations

Accountants and ethics

Organisations will have either a COMPLIANCE-BASED, or INTEGRITY-BASED, approach. Other influences Personal ethics of employees Professional ethics (eg ACCA) Organisational culture Organisational systems (eg mission statements)

Derive from: religious/non religious views upbringing political views Culture discussed in Chapter 3

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Context
Ensuring that the behaviour of all members of staff is carried out in an ethical manner should be a major concern for the management of any organisation. Within an organisation the behaviour of staff will be influenced by a number of factors which are examined in this section.

Key learning points

Ethics in organisations relates to social responsibility and business practice. Ethics may be split for the accountant into personal and professional. The effects of an organisation will be a function of both the organisation's culture and the organisational systems in place. A compliance based approach to ethics ensures that an organisation acts within the letter of the law. An integrity based approach combines a concern for the law with an emphasis on managerial responsibility for ethical behaviour.

Topic tip
Whistleblowing is the disclosure by an employee of the illegal, immoral or illegitimate practices on the part of an organisation. This action may be seen to encourage an ethical approach by organisations. However whistleblowers often face financial loss because of their actions. Consider what actions an organisation might take to encourage a more ethical approach amongst its staff.

Learning example 4.6

Match the method of control with the approach to ethics. Method of control - bureaucratic control, cultural control Ethical approach - compliance based, integrity based

Learning example 4.7

The audit of contracts, systems for employees to report criminal misconduct, and disciplinary procedures to deal with transgressions are all examples of which approach to managing ethics? A B Compliance-based Integrity-based

Solution 4.6
A compliance-based approach suggests that bureaucratic control is necessary; an integrity-based approach relies on cultural control.

Solution 4.7
A A compliance based approach is primarily designed to ensure that the company acts within the letter of the law.

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ACCOUNTANTS AND ETHICS

Don't take on work not competent to do!

IFAC International Federation of Accountants represents all the major accountancy bodies worldwide.

A framework of rules

Management accountability

The ethical environment

Ethics in organisations

Accountants and ethics

Why should accountants behave ethically? Laws and regulation Upholding of professional standards and qualities (personal/professional) Protection of the public interest

The accountant:
IFAC international body with its own code of ethics. ACCAs is aligned:

Enshrined in a Code of Ethics or Code of Conduct Codes can be or rules-based to account for every possible situation Principles and frameworks to guide behaviour

Minimum level of conduct

F u n d a m e n t a l s

Integrity Objectivity Professional competence Confidentiality Professional behaviour

via: reliability, responsibility, timeliness, courtesy, respect

Compliancebased approach

Integritybased approach

Professional qualities: Independence Scepticism Accountability Social responsibility

Personal qualities: Reliability Responsibility Timeliness Courtesy Respect

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Context
The final part of this chapter examines a code of ethics for accountants. The accountant in business will be presented with both the ethical environment within the business they work for but also as members of the accountancy profession with a separate ethical code.

Key learning points

As a member of IFAC, ACCA has its own code aligned to the IFAC code. Both personal and professional qualities are expected of an accountant. The accountants work may affect the public in a number of ways: Audit work Accountancy work Investment decisions.

Learning example 4.8

Which of the following are the personal qualities of an accountant? Reliability Accountability Independence Respect Timeliness

Learning example 4.9

Which of the following is not a professional quality expected of an accountant? A B C D Accountability Courtesy Scepticism Independents

Solution 4.8
The personal qualities that an accountant should demonstrate are: reliability, respect, timeliness together with responsibility and courtesy.

Solution 4.9
B Courtesy and consideration towards clients, colleagues and all others is an example of a personal quality expected of an accountant.

Web
For more on the ACCAs code of ethics, visit its website at www.accaglobal.com

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Reinforcement
Study Text Chapter 4 Listen to Session 4 of the BPP Learning Media Success CD for this subject Please attempt multiple choice questions from Section 4 and objective test questions from Section 22 on Ethical considerations from the BPP Practice and Revision Kit Attempt Quick Quiz

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