Does Obeying the Law Equal Ethical Conduct

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Does Obeying the Law Equal Ethical Conduct?

• Janet E. DeMay, CMA, CFM, CPA
• e-mail janet_demay_at_lord.com

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• Speaker Bio
• Janet E. DeMay currently works for Lord
  Corporation in Erie, PA, in the position of
  Supervisor of Project Accounting. Prior to her
  current position, she has held accounting
  positions at Werner Ladder Company, Diefenbach,
  Delio, Kearney DeDionisio, CPAs, and Zurn
  Industries, Inc,.
• Janet graduated from Penn State University with a
  BS in Accounting in 1990 and is currently
  pursuing her MBA at the Penn State Behrend
  campus. She became a CPA in 2000, and obtained
  her CMA CFM certifications in 2003. She is a
  member of the IMA, AICPA and PICPA.
• Janet is actively involved with the IMA and
  serves as Treasurer of the Erie Chapter of the
  Keystone Mountain States Council. She has also
  held the position of the Erie Chapter Director of
  Communications. She was recently appointed to
  the board of directors of the 1st Choice
  Community Federal Credit Union in Erie PA as
  Treasurer. Janet is actively involved in the
  Leadership Training program at Lord Corporation
  and is also a member of Toastmasters. She
  currently resides in NW PA with her husband Geof.

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Learning Objectives

• Does Obeying the Law Equal Ethical Conduct?
• What is Business Ethics?
• Define Corporate Governance
• Corporate Social Responsibility (CSR) Pyramid
• Company Codes of Conduct
• Role of Accountants as Professionals
• IMAs Role in Professional Ethics Education

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Accountants Accounting Scandals
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• The Cheating Culture

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Reasons Accountants Were Inclined to Behave
Unethically (1980s 1990s)

• A Lenient Regulatory Environment - legal to take
  on consulting services for the same clients that
  accounting firms also audited.
• Personal Computers decreased accounting service
  revenues (Lotus 1 2 3 Quicken). Accountants
  turned to providing consulting services to fill
  the void. No link was made between providing
  these services and an impairment of auditor
  objectivity and independence
• Political Lobbying against further regulations.
  The AICPA argued that the accounting industry
  could police itself (Callahan, 2004).

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Five Key Reasons Business People are Inclined to
Behave Unethically (adapted from Callahan, 2004)

• Todays Competitive Economy with Bigger Rewards
  for Winners.
• Potential for Gain Outweighs the Consequences of
  Being Caught.
• Perceived Injustice.
• Perception that Upper Level Executives are
  Responsible.
• The Little Guy is Just Following Orders.
• Perceived Difference Between Personal and
  Professional Lives
• What Happens at the Office Stays at the
  Office.

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What is Business Ethics?

• The Science of Conduct.
• The Fundamental Ground Rules by Which We Live
  Our Lives.
• A Management Discipline that Encourages
  Professionals to Understand the Difference
  Between Right and Wrong in the Workplace, and
  to Do What is Right in Regard to Effects of
  Products/Services and in Relationships with
  Stakeholders (McNamara, 2006).

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• What Becomes an Ethical Guideline Today is Often
  Translated to a Law, Regulation or Rule Tomorrow
  (McNamara 2006).
• Laws Can be Viewed as Representing Societys
  Minimum Norms and Standards of Business
  (Trevino, 2004).

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IRS Tax Code Minimum Tax

• A. Pay Additional 50 in Tax
• B. Pay 50 to a Charity
• Keep 50

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IRS Tax Code Minimum Tax

• D. Keep 50 Still Take Charitable Deduction

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Two Broad Areas of Business Ethics

• Managerial Mischief
• Moral Mazes

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Business Ethics Looks at Two Key Questions

• How Do Managers Decide on What is Right in
  Conducting Their Business?
• Once Managers Have Recognized What is Right, How
  Do They Achieve it?

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Golden Rule

• Do Unto Others . . .

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What is Considered an Ethical Dilemma?

• Significant Value Conflicts Among Differing
  Interests
• Real Alternatives That are Equally Justifiable
• Significant Consequences on Stakeholders
• (McNamara, 2006)

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• Most People are Inclined to Obey the Law But
  This Reflex Can Be Undermined if the Law is
  Widely Seen as Lacking Legitimacy (Tyler, 1990).

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Radar Detectors

• Are Radar Detectors ethical or unethical
  products?
• Is avoiding being caught the same as obeying the
  law?
• Can the companies who produce radar detectors be
  considered to be socially responsible?
• Does an accountant who either owns/uses these
  products or provides services to the companies
  that produce them exhibiting ethical behavior?
• Are there other stakeholders in this scenario?

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Corporate Governance Defined

• The Structure and the Relationships which
  Determine Corporate Direction and Performance.
  (McRitchie, 2006)
• The System by which Companies are Directed and
  Controlled (Sir Adrian Cadbury, The Committee
  on the Financial Aspects of Corporate
  Governance) (McRitchie, 2006).
• A Field of Economics that Investigates How to
  Secure/Motivate Efficient Management of
  Corporations by the Use of Incentive Mechanisms,
  Such as Contracts, Organizational Designs and
  Legislation. Often Limited to the Question of
  Improving Financial Performance (Mathiesen,
  2002)
• (McRitchie, 2006)

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Corporate Governance Defined

• Corporate Governance Deals with the Way
  Suppliers of Finance Assure Themselves of
  Getting a Return on Their Investment (Shleifer
  and Vishny, 1997).
• Standard and Poors Definition is The Way in
  Which a Company Organizes and Manages Itself to
  Ensure that All Financial Stakeholders Receive
  Their Fair Share of a Companys Earnings and
  Assets
• (McRitchie, 2006)

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Corporate Social Responsibility Pyramid
Trevino, Linda K. and Nelson, Katherine A.
Managing Business Ethics, Third Edition.
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Economic Responsibility

• Basis for the Companys Corporate Governance
  System
• Milton Friedmans Doctrine States that
  Management Should Make as Much Money as
  Possible While Conforming to the Basic Rules of
  Society, Both those Embodied in the Law and
  those Embodied in Ethical Custom (Trevino,
  2004).
• Calvin Coolidges Famous Maxim
• The Business of Business is Business
• (Roleff, 1996).

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• While Business Ethicists Demand that Companies
  Contribute to Society, Economists and
  Capitalists Insist that a Firms Only Debt is to
  its Owners
• Accountants Find Themselves Caught in the Middle
  of this Debate, Since Accounting Concepts Have
  Strong Links to Economic Theory and Draws
  Strongly on Utilitarian Ethics (Dolfsma, 2006).

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Utilitarianism

• An Ethical Decision Should Maximize Benefits to
  Society and Minimize Harms.

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Legal Responsibility

• All Firms are Required to Abide by the Laws and
  Regulations of the Country in Which They Operate,
  and Act in a Legally Responsible Manner.

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Ethical Responsibility

• Distinctly Separate from the Firms Legal
  Responsibility
• The Ethical Responsibilities Encompass the More
  General Responsibility to Do Whats Right and to
  Avoid Harm (Trevino, 2004).

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Stakeholders

• Anyone or Anything That Has an Interest or a
  Share in an Endeavor or Undertaking.

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Philanthropic Responsibility

• Participation in Activities that Promote Human
  Welfare or Goodwill (Trevino, 2004).
• Voluntary

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Company Codes of Conduct
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Company Codes of Conduct

• Impossible to Write a Policy that Covers
  Every Possible Ethical Situation
• Most Employees Do Not Read Lengthy Polices

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Company Codes of Conduct

• Enron Published a 62 Page Booklet in July, 2000.
• The Code was Intended to Help Guide Enron in
  Conducting the Business Affairs of the Company
  in Accordance with all Applicable Laws and in a
  Moral and Honest Manner (www.thesmokinggun.com).
  

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Company Codes of Conduct

• Tone at the Top Really Does Matter
• Link Between Ethical Behavior and Superior
  Financial Results

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Values Influence

• Relationships
• Reputations

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Fortune Magazines Top 100 Employers to Work For
2007

• 1. Google 6. Network Appliance
• 2. Genentech 7. S.C. Johnson Son
• 3. Wegmans Food Markets 8. Boston Consulting
  Grp.
• 4. Container Store 9. Methodist Hospital
  Sys.
• 5. Whole Foods Market 10. W.L. Gore
  Associates
• http//money.cnn.com/magazines/fortune/bestcompani
  es/2007/

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Reputation Institutes Worlds Most Reputable
Companies for 2007

• 1. Lego, a 70-year-old Danish toy manufacturer
• 2. IKEA, a Swedish furniture company
• 3. Barilla, an Italian pasta, sauce and
  specialty food company
• Mercadona, a Spanish grocery chain.
• Determinants of citizenship include trust and
  relationships and sustainability. The report
  indicated that Western European companies are
  much farther ahead on the area of citizenship
  than U.S.-based companies.
• Weiss, Tara. The Worlds Most Reputable
  Companies, Forbes, May 23, 2007.

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Business Ethics 2006 Winners Circle

• Starbucks Coffee Company Corporate
  Responsibility Management
• For leadership and excellence in best practices
  in the field of corporate responsibility.
• Patagonia, Inc. Environmental Sustainability
• For its unique commitment to developing
  sustainable business practices.
• Hypertherm, Inc. General Excellence
• For workplace innovation focusing on development
  of people and products.
• Berrett-Koehler Publishers Stakeholder
  Accountability
• For its focus on creating quality products in
  collaboration with employees, business partners,
  and customers.

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Business Ethics Best Corporate Citizens 2006

• Green Mountain Coffee Roasters, Inc.
• Hewlett-Packard Company
• Advanced Micro Devices, Inc.
• Motorola, Inc.
• Agilent Technologies, Inc.
• Companies that excel at serving a variety of
  stakeholders well
• Business Ethics 18th Annual Awards,
  http//www.thecro.com/?qnote/167speshprintme,
  accessed February 11, 2007.

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Company Code of Conduct

• Most Companies Publish Their Codes of Conduct on
  Their Company Websites
• Normally Tailored to the Companys Specific
  Industry
• Most Codes Contain the Same Basic Ethical
  Directives
• Google Dont Be Evil
• Include a Legal Disclaimer

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• Financial Managers and Management Accountants
  Need to Exemplify Ethical Leadership by Aligning
  Their Behavior With Their Stated Views.
  (Verschoor, 2005)

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• The Professional Accountants
• Social Responsibility

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Three Ps of Reform

• Principles A Return to Principles-Based
  Accounting
• Profession Accounting Should be Practiced as a
  Profession Rather than a Business
• Pride Reclaiming Pride in the Profession,
  Based on a Correct Self-Image of the Profession
  

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• All of These in Turn Require Attention to the
  Ethical Foundations of Accounting (Cheffers
  Pakuluk, 2005).

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• A Business Provides a Service to Please a
  Customer and is Ultimately at the Bidding of the
  Customer a Profession Serves the Public Interest
  by Adhering to an Ideal (Cheffers Pakuluk,
  2005).

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• The Virtues of an Accountant are those Traits
  that Enable a Practitioner to Carry Out Well the
  Distinctive Task of Accountancy. It is the
  Fostering of Trust that is Necessary for the
  Sound Operation of Commerce and the Marketplace
  (Cheffers Pakuluk, 2005) .

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Summary

• Ethical Infractions are Normally the Basis for
  Forming Laws. Most Laws are Written to
  Establish a Minimum Acceptable Level of
  Performance.
• Most People are Inclined to Obey the Law but
  this Reflex can be Undermined if the Law is
  Widely Seen as Lacking Legitimacy

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Summary

• Ethical Dilemmas Do Not Have Clearly Right or
  Wrong Answers.
• Signals of Ethical Dilemmas
• a) significant value conflicts among differing
  interests,
• b) real alternatives that are equally
  justifiable, and
• c) significant consequences on stakeholders
  in the situation (McNamara, 2006).

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Summary

• Corporate Governance is the System by Which
  Companies are Directed and Controlled.
• The Corporate Social Responsibility Pyramid
  Clearly Distinguishes Between the Firms Legal
  Responsibility and its Ethical Responsibility.
• Most Company Codes of Conduct Direct Employees to
  Seek Guidance from the Companys Legal Council.
  This May Lead Employees to Believe that
  Following the Letter of the Law is Ethical
  Conduct.

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Summary

• Accountants are Professionals Entrusted by the
  Public. Recent Accounting Scandals have
  Tarnished the Professional Image of Accountants.
  
• The Three Ps of Reform for the Accounting
  Profession Calls for a Return to
  Principles-Based Accounting, A Rediscovery of
  Accounting as a Profession, and the Reclaiming
  of Pride in the Profession.

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Role of IMA in Ethics Education

• IMAs Statement of Ethical Practice
• IMA Ethics Center at www.imanet.org
• Ethics Helpline
• Ethics Resource Center
• Strategic Finance Magazine
• May, 2006 Issue Creating an Ethical Culture
• Written by David Gebler

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Other Sources of Information

• Included in Handout

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Questions?