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© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7–2

Explain briefly the meaning of ethics.

Describe

how ethics and

economic progress

are

connected.

Describe

briefly the function of

corporate social

responsibility (CSR).

Recount

the events in some of the

more famous

corporate financial scandals.

Explain

how ethics can be taught.

Explain

how internal controls

can facilitate

ethical behavior and

help prevent

financial impropriety.Slide3

Philosophical Principles of Ethics

Imperative Principle

Do what is right.

Utilitarian Principle

Do what produces the greatest good.

Generalization Argument

Do what is right, but filter the action by consideration of the consequences.

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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What Is Ethics?EthicsThe branch of philosophy that addresses the

values pertaining to human behavior, with regard to the “rightness” and “wrongness” of actions and to the “goodness” and “

badness” of the intent

and results

of such actionsIntegrityAdherence to moral and ethical principles; soundness of moral character; honesty. As a practical matter, a person of integrity knows what is right and has the courage to do it© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

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EXHIBIT 7.1

BASIC STEPS IN ETHICAL DECISION-MAKING

Define

all the facts and circumstances, including who, what, where, when, and how.Identify the people affected by the situation and their rights and obligations.Identify the alternative decisions and consequences.Make the decision: determine the right thing to do and then do it.Slide6

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

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EXHIBIT 7.2

THE BBB CODE OF BUSINESS PRACTICES

Build

Trust: Establish and maintain a positive track record in the marketplace.Advertise Honestly: Adhere to established standards of advertising and selling.Tell the Truth: Honestly represent products and services, including clear and adequate disclosures of all material terms.Be Transparent: Openly identify the nature, location, and ownership of the business, and clearly disclose all policies, guarantees, and procedures that influence a customer’s decision to buy.

Honor Promises: Abide by all written agreements and verbal representations.Be Responsive: Address marketplace disputes quickly, professionally, and in good faith.Safeguard Privacy: Protect any data collected against mishandling and fraud, collect personal information only as needed, and respect the preferences of customers regarding the use of their information.Embody Integrity: Approach all business dealings, marketplace transactions, and commitments

with integrity.Slide7

Ethics in Business and SocietyFor ethical business activity to occur, mutual

trust, fair dealings, and honest communication are essential.Ethics and Economics

Unethical behavior (e.g., inside information) destroys fair investment markets

Commonly-shared positive ethical

values regarding respect for individuals, their lives, their property, and their freedoms promote individual integrity and doing the “right thing”© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

7Slide8

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

8

EXHIBIT 7.3

FCPA VIOLATIONS AND CORRUPTION PERCEPTIONS INDEX FOR SELECTED COUTRIES

Corruption

Perceptions Index (CPI) is published each year by Transparency International, providing

metrics to the potential corruption risk for 180 countries.Slide9

What Is Corporate Social Responsibility?Corporate Social Responsibility (CSR)A firm’s obligations

to society, including the welfare of people and places affected by its activitiesCSR ActionsProvide quality products or

services

Engage in ethical

accounting and principled business practicesBe responsible for fair treatment of employeesMeet the firm’s obligations to all stakeholdersCustomers, suppliers, creditors, lenders, and investorsCare for and protect the environment© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Rules, Policies, and GuidelinesMaking an ethical choice:Follow legal rules

Apply the formal ethical policies of your organizationUse your moral intuition to answer the following:What would your mother or father say if you acted in that way?

How

would you feel if you saw your situation described in the newspaper?

Does the situation “smell bad?”Would you use your behavior as a marketing tool?© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–10Slide11

Making an Ethical DecisionThe Principle of ConsistencyConsidering what would be the consequences if everyone made the same choice that you are about to make.

The Principle of RespectTo apply the principle of respect, you would choose the alternative or choice that treats people with the greatest respect.

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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11Slide12

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

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EXHIBIT 7.4

STEPS TO ENSURE INTEGRITY AT

EXXONMOBIL

A substantial majority of the Board of Directors are non-employees.The Board Audit Committee is empowered to investigate any matters brought to its attention and has 100 percent non-employee membership.An independent internal audit staff assesses compliance with policies and procedures, and evaluates control effectiveness in about 300 audits conducted annually around all business units.

Steps are taken to assure the independence of both internal and external auditors.Employees regularly review and discuss expectations, and are encouraged to raise questions or concerns.Violations are promptly reviewed, communicated upward, and acted upon.Slide13

Financial Scandals: Enron BankruptcyEnronWas

a major global provider of electricity, natural gas, pulp and paper, and communications servicesUsed innovative and misleading accounting in “cooking its books

” to

avoid disclosing unprofitable operations

Was a key event leading the U.S. Congress to pass a new federal securities law for financial accounting and reporting transparency, the Sarbanes-Oxley Act of 2002, often referred to as “SOX”© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

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Financial Scandals: WorldCom BankruptcyWorldComUsed fraudulent accounting methods to manipulate earnings to present

a false image of growth and prosperity to prop up the firm’s stock priceUnderreported “line costs” as assets rather than expensing them and fraudulently overstated revenues

Internal auditors eventually discovered the fraud and the firm filed for bankruptcy protection which wiped out the investments of stock and bond holders

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7–14Slide15

Financial Scandals: VivendiVivendiUsed fraudulent accounting methods for several years to hide cash flow, liquidity, and financial obligation problems to boost its apparent financial performance to enhance its stock price and make several acquisitions

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Financial Scandals: Parmalat BankruptcyParmalat

Used risky derivatives and purchase of its own debt to disguise losses in several of its new international acquisitionsWas placed under control of a commissioner by the Italian government after the firm collapsed into bankruptcy when it could not pay of its debt and make its bond payments

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Other Financial ScandalsTeapot Dome ScandalResulted from the secret leasing of Teapot Dome oil reserves to a businessman who paid

Secretary of the Interior Albert Fall hundreds of thousands of dollars in zero-interest loansPonzi (Pyramid) SchemeA fraud in which money received from

later investors

is used to

provide returns to earlier investors, thus giving an appearance of a profitable investment© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–17Slide18

Can Ethics Be Taught?

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

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EXHIBIT 7.5

HOW DO YOU MEASURE SUCCESS?

Many people think of fame and fortune when they measure success. However, at some point

in life, most people come to realize that inner peace and soul-deep satisfaction come not from fame and fortune, but from having lived a life based upon integrity and noble character. President Lincoln put it this way: “Honor is better than honors.” At a Congressional Hearing on ethics in July 2002, Truett Cathy, founder of Chick-

Fil-A, quoted Proverbs 22:1: “A good name is more desirable than great riches; to be esteemed is better than silver or gold.” In the final analysis, living an honorable life really is more satisfying than fame and fortune. How do you measure success?Slide20

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

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EXHIBIT 7.6

ETHICS IN BUSINESS AND SOCIETY:

SELECTED QUOTATIONS

“ Associate with men of good quality, if you esteem your own reputation; for it is better to be alone than in bad company.” (George Washington)“Honor is better than honors.” (Abraham Lincoln)“To educate a person in mind and not in morals is to educate a menace to society.” (Theodore Roosevelt

)“A good name is more desirable than great riches; to be esteemed is better than silver or gold.” (King Solomon)“To see what is right and not to do it is want of courage.” (Confucius)”It has become dramatically clear that the foundation of corporate integrity is personal integrity.” (Sam DiPiazza, CEO of PricewaterhouseCoopers)

“A people that values its privileges above its principles soon loses both.” (Dwight D. Eisenhower

)Slide21

Internal ControlsInternal ControlsA system of rules and procedures

designed to ensure the accuracy and reliability of financial and accounting informationInternal Control ProceduresPreventing accidental errors and irregularities (intentional misrepresentations)

Identifying errors and irregularities for corrective action

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Foreign Corrupt Practices ActForeign Corrupt Practices Act (FCPA) of 1997

Applies to U.S. firms and to foreign firms that engage in business in the U.S.Consists of two parts:

An anti-bribery provision

A

requirement to maintain an adequate internal control system over financial books and records© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7–22Slide23

Sarbanes-Oxley Act (“SOX”) of 2002Sarbanes-Oxley Act (“SOX”) of 2002

Increased the prison sentence for fraud to 25 yearsEstablished 20-year sentences for destroying, altering,

or fabricating

records in federal investigations, or any

scheme to defraud shareholdersRequires that the Chief Executive Officer and Chief Financial Officer of a publicly traded corporation must certify that its financial statements accurately presents the firm’s financial condition and results of the firm’s operations© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Computer Security of Accounting InformationBasic Threats to Computer Security

Natural disastersDishonest employeesDisgruntled employeesPersons external to the organizationAccidental errors and omissions

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–

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KEY TERMS

ethics

integrity

Corruption Perceptions Index (CPI)corporate social responsibility (CSR)mark-to-market accountingPonzi schemeinternal controls

Foreign Corrupt Practices Act