AFM 131 - Chapter 5 Notes.docx

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University of Waterloo
Accounting & Financial Management
AFM 131
Robert Sproule

Chapter 5 Notes 1 Ethics and Social Responsibility Ethics is More Than Legality:  Ethics and legality are two different things. Ethics reflects people’s proper relations with one another: How should people treat others? Legality refers to laws we have written to protect ourselves from fraud, theft, and violence. Ethical Standards are Fundamental  Ethics are the standards of moral behavior; that is, behavior that is accepted by society as right versus wrong.  Today, people seem to think that what is right is whatever works best for the individual, and that each person has to work out for themselves the difference between right and wrong. Ethics Begins with Each of Us  When facing an ethical dilemma, we should ask ourselves: o Is it Legal? o Is it balanced? o How will it make mefeelabout myself? Managing Businesses Ethically and Responsibly:  Any trust and co-operation between workers and managers must be based on fairness, honesty, openness, and moral integrity.  A business should be managed ethically for many reasons: to maintain a good reputation; to keep existing customers; to attract new customers; to avoid lawsuits; to reduce employee turnover; to avoid government intervention (the passage of new laws and regulations controlling business activities); to please customers, employees, and society; and simply to do the right thing. Setting Corporate Ethical Standards  Ethics codes can be classified into two major categories: compliance-based and integrity-based.  Compliance-based ethics codes are ethical standards that emphasize preventing unlawful behavior by increasing control and by penalizing wrongdoers. They are based on avoiding legal punishment.  Integrity-based ethics codes are ethical standards that define the organization’s guiding values, create an environment that supports ethically sound behavior, and stress a shared accountability among employees.  Six steps can help improve business ethics: 1. Top management must adopt and unconditionally support an explicit corporate code of conduct. 2. Employees must understand that expectations for ethical behavior begin at the top and that senior management expects all employees to act accordingly. 3. Managers and others must be trained to consider the ethical implications of all business decisions. Chapter 5 Notes 2 4. An ethics office must be set up. Phone lines to the office should be established so that employees who don’t necessarily want to be seen with an ethics officer can inquire about ethical matters anonymously. Whistleblowers (people who report illegal or unethical behavior) must feel protected from retaliation as oftentimes this exposure can lead to great career and personal cost. 5. Outsiders such as suppliers, subcontractors, distributors, and customers must be told about the ethics program. Pressure to put aside ethical considerations often comes from the outside, and it helps employees to resist such pressure when everyone knows what the ethical standards are. 6. The ethics code must be enforced. It is important to back any ethics program with timely action if any rules are broken. This is the best way to communicate to all employees that the code is serious. FEATURES OF COMPLIANCE-BASED FEATURES OF INTEGRITY-BASED ETHICS ETHICS CODES CODES Conform to outside Conform to outside standards (laws Ideal: standards (laws Ideal: and regulations) and regulations) and chosen internal standards Avoid criminal Enable responsible Objective: misconduct Objective: employee conduct Managers with aid Leaders: Lawyers Leaders: of lawyers and others Education, Education, reduced leadership, employee Methods: discretion, Methods: accountability, controls, and decision processes, controls, and penalties penalties  An important factor in the success of enforcing an ethics code is the selection of the ethics officer. The most effective ethics officers set a positive tone, communicate effectively, and relate well with employees at every level of the company. Effective ethics officers are people who can be trusted to maintain confidentiality, can conduct objective investigations and ensure that the process is fair, and can demonstrate to stakeholders that ethics is important in everything that the company does. The Sarbanes-Oxley Act of 2002 (SOX) Chapter 5 Notes 3  After the accounting scandals in the US in the early 2000s, it created the US federal legislation known as the Sarbanes-Oxley Act (SOX).  It established stronger standards to prevent misconduct and improve corporate governance practices.  SOX applies to all publicly-traded companies whose shares are listed on the stock exchanges under the jurisdiction of the US Securities and Exchange Commission.  Its goal is to ensure the accuracy and reliability of published financial information, and thus the main part of the legislation requirements deal with the proper administration routines, procedures, and control activities. Whistleblowing Legislation in Canada  Bill C-11: The Public Servants Protection Disclosure Act provides for significant powers to investigate wrongdoing, contains a clear legal prohibition of reprisal against those who make good-faith allegations of wrongdoing and it proposes measures to protect the identity of persons making disclosures. Corporate Social Responsibility:  Corporate social responsibility (CSR) is a business’s concern for the welfare of society as a w
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