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Topic 2 : Analyzing Ethical Issues & Topic 3 : Stakeholders and Their Influences

Topic 2 : Analyzing Ethical Issues & Topic 3 : Stakeholders and Their Influences. Objectives Nature of an ethical issue with examples Factors influencing individuals’ ethical judgment Stakeholders and their influences Simple framework for analyzing ethical issues. Ethical Dilemma.

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Topic 2 : Analyzing Ethical Issues & Topic 3 : Stakeholders and Their Influences

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  1. Topic 2 : Analyzing Ethical Issues &Topic 3 : Stakeholders and Their Influences Objectives • Nature of an ethical issue with examples • Factors influencing individuals’ ethical judgment • Stakeholders and their influences • Simple framework for analyzing ethical issues

  2. Ethical Dilemma Linda was engaged to perform an audit of the annual financial statements of Wong & Wong company. During the course of her examination of records, she discovered that certain items were misstated on the previous year’s profit tax return, which resulted in large tax advantages for Wong & Wong company. The tax return was prepared by her boyfriend, David. It appeared to her that the discrepancies on the tax return resulted from a deliberate effort to manipulate facts and figures with the sole intent of reducing taxes. Late, she found out from David that he had accepted Mr. Wong’s proposal for the tax evasion, and had received $200,000 cash from Mr. Wong to pay for the down payment of their apartment and part of their wedding cost. The wedding was scheduled in two weeks time. Linda cannot decide what, if anything, she should do about this discovery.

  3. The Meaning Of An Ethical Issue • Choosing among several ethical or unethical alternatives • Common factors : • Conflicts in moral principles and values • e.g., Honesty – truthfulness, integrity and trustworthiness • Fairness – just, equitable and impartial • Conflict of interest: advance own interest or those of others • Desire for personal gain, dubious personal character, competitive working environment, pressures … • Failure to acknowledge ethical issues is a great danger • A rule of thumb: withstand open discussion, and survive untarnished

  4. Examples Of Ethical IssuesFor Professional Accountants • General: conflict of interest, confidentiality, bribery, insider trading, whistle-blowing……. • For auditors: independence, integrity and objectivity, pressures (time, fees, competition)……. • For financial accountants: accuracy of books and records, manipulation of accounts… • For management accountants: budgeting issues, reliability of management reports… • For tax consultants: tax evasion, pressures….

  5. Five Major Factors Influencing Individuals’ Ethical Judgement • Moral development of the decision-maker • Stakeholders and their influences • Decision criteria or approaches used in assessing various alternatives • Standards of behaviour as benchmarks • Temptations to rationalize unethical alternatives

  6. Moral Development Of The Decision-Maker • Kohlberg’s Theory : different people make different decisions in similar ethical situations because they are in different stages of cognitive moral development • Six stages of moral development: • Fear of punishment: • Respond to rules and labels of “good” and “bad” in terms of authority figures • Seeking rewards and avoiding punishment: • No longer make moral decisions only based on rules or authority figures; also evaluate behavior on the basis of its fairness to him/herself. • Desire for approval by peer group: • Emphasizes others rather than him/herself

  7. Moral Development Of The Decision-Maker • Six stages of moral development: • Sense of duty to obey laws: • Duty and maintaining the social order become the focal points => duties to society as a whole • Obeying laws while preserving individual rights: • Upholding the basic rights, values, and legal contracts of society • Finding satisfaction for being ethical: • Believes that the right is determined by universal ethical principles that everyone should follow • People continue to change their decision priorities beyond their formative years

  8. Stakeholders And Their Influences • Owning a vested interest or a stake in the ethical decision • Primary versus secondary • Categorizing Stakeholders: Social Govt Prof Work Psnl DM

  9. Stakeholders And Their Influences • Influences : Bi-directional in nature • The decision-maker may influence stakeholders’ interests • Stakeholders may also ‘exercise’ influences on the decision maker • Example : Linda’s decision making • Whose interests will be affected ? • Who can influence her decision ? Social Govt Prof work Psnl • Assessing the influences from stakeholders

  10. Stakeholders And Their Influences • Influences : Bi-directional in nature • The decision-maker may influence stakeholders’ interests • Stakeholders may also ‘exercise’ influences on the decision maker • Example : Linda’s decision making • Whose interests will be affected ? • Who can influence her decision ? • Outside the employing organization: • e.g. family and peer group • Exercising a wide range of influences • e.g. moral development, value system, self-image, goals, role models, standards of behaviour • Positive and negative influences Social Govt Prof work Psnl • Assessing the influences from stakeholders

  11. Stakeholders And Their Influences • Work-related : “Internal” versus “external” stakeholders • Influences coming from a variety of sources • e.g. work pressure, reward system, internal controls, authority structure, access to information … • Positive and negative influences • Outside the employing organization: • e.g. family and peer group • Exercising a wide range of influences • e.g. moral development, value system, self-image, goals, role models, standards of behaviour • Positive and negative influences Social Govt Prof work Psnl • Assessing the influences from stakeholders

  12. Stakeholders And Their Influences • Influences : Bi-directional in nature • The decision-maker may influence stakeholders’ interests • Stakeholders may also ‘exercise’ influences on the decision maker • Example : Linda’s decision making • Whose interests will be affected ? • Who can influence her decision ? • Work-related : “Internal” versus “external” stakeholders • Influences coming from a variety of sources • e.g. work pressure, reward system, internal controls, authority structure, access to information … • Positive and negative influences • Professional bodies • e.g. licensing and disciplinary mechanisms, standards, guidelines and statements, quality review system … • Other members • e.g. exercising mutual influences • The public • e.g. ability to withdraw public trust • Outside the employing organization: • e.g. family and peer group • Exercising a wide range of influences • e.g. moral development, value system, self-image, goals, role models, standards of behaviour • Positive and negative influences Social Govt Prof work Psnl • Assessing the influences from stakeholders

  13. Stakeholders And Their Influences • Influences : Bi-directional in nature • The decision-maker may influence stakeholders’ interests • Stakeholders may also ‘exercise’ influences on the decision maker • Example : Linda’s decision making • Whose interests will be affected ? • Who can influence her decision ? • Major influences : Laws and regulations • e.g. Companies Ordinance • Prevention of Bribery Ordinance • Companies (Amendment) Bill 1991 • Insider Dealing Ordinance • Governing not only accountants • Work-related : “Internal” versus “external” stakeholders • Influences coming from a variety of sources • e.g. work pressure, reward system, internal controls, authority structure, access to information … • Positive and negative influences • Professional bodies • e.g. licensing and disciplinary mechanisms, standards, guidelines and statements, quality review system … • Other members • e.g. exercising mutual influences • The public • e.g. ability to withdraw public trust • Outside the employing organization: • e.g. family and peer group • Exercising a wide range of influences • e.g. moral development, value system, self-image, goals, role models, standards of behaviour • Positive and negative influences Social Govt Prof work Psnl • Assessing the influences from stakeholders

  14. Stakeholders And Their Influences • Influences : Bi-directional in nature • The decision-maker may influence stakeholders’ interests • Stakeholders may also ‘exercise’ influences on the decision maker • Example : Linda’s decision making • Whose interests will be affected ? • Who can influence her decision ? • Major influences : Laws and regulations • e.g. Companies Ordinance • Prevention of Bribery Ordinance • Companies (Amendment) Bill 1991 • Insider Dealing Ordinance • Governing not only accountants • A range of environmental stakeholders • e.g. society, local communities, neighbours and citizens • Generally accepted moral principles • Work-related : “Internal” versus “external” stakeholders • Influences coming from a variety of sources • e.g. work pressure, reward system, internal controls, authority structure, access to information … • Positive and negative influences • Professional bodies • e.g. licensing and disciplinary mechanisms, standards, guidelines and statements, quality review system … • Other members • e.g. exercising mutual influences • The public • e.g. ability to withdraw public trust • Outside the employing organization: • e.g. family and peer group • Exercising a wide range of influences • e.g. moral development, value system, self-image, goals, role models, standards of behaviour • Positive and negative influences Social Govt Prof work Psnl • Assessing the influences from stakeholders

  15. Stakeholders And Their Influences • Influences : Bi-directional in nature • The decision-maker may influence stakeholders’ interests • Stakeholders may also ‘exercise’ influences on the decision maker • Example : Linda’s decision making • Whose interests will be affected ? • Who can influence her decision ? • Major influences : Laws and regulations • e.g. Companies Ordinance • Prevention of Bribery Ordinance • Companies (Amendment) Bill 1991 • Insider Dealing Ordinance • Governing not only accountants • A range of environmental stakeholders • e.g. society, local communities, neighbours and citizens • Generally accepted moral principles • Discrepancy between actual and perceived influences • Examples of influences often misestimated • Examples of positive and negative impact often misestimated • Steps to arrive at a “no-regret” decision • Distinguishing between primary and secondary stakeholders • Prioritizing their respective interests • Assessing their influences critically • Work-related : “Internal” versus “external” stakeholders • Influences coming from a variety of sources • e.g. work pressure, reward system, internal controls, authority structure, access to information … • Positive and negative influences • Professional bodies • e.g. licensing and disciplinary mechanisms, standards, guidelines and statements, quality review system … • Other members • e.g. exercising mutual influences • The public • e.g. ability to withdraw public trust • Outside the employing organization: • e.g. family and peer group • Exercising a wide range of influences • e.g. moral development, value system, self-image, goals, role models, standards of behaviour • Positive and negative influences Social Govt Prof work Psnl • Assessing the influences from stakeholders

  16. Decision Criteria Used In Assessing Alternatives • Provide different justifications for making a decision • Shape a decision maker’s ethical judgment • Provide a set of useful guidelines • Three common criteria or approaches • Utilitarian : Benefits outweighing costs • Rights : Respecting stakeholders’ rights • Justice : Fair distribution of costs and benefits among stakeholders • Need to prioritize different concerns

  17. Standards Of Behaviour as Benchmarks Society’s moral principles and values Government laws and regulations Trade / profession-related codes Alts ??? Corporate culture / code of conduct Decision-maker’s own values and beliefs

  18. Temptations To RationalizeUnethical Alternatives • The essence of rationalization : Acceptance of making unethical decisions • Typical rationalizations • e.g. within reasonable ethical and legal limits • In the best interests of others • The alternative is safe • Superiors’ unethical instructions • Fear to loosing jobs….

  19. Conflict of interest; independence, integrity & objectivity • bribery; tax evasion…. • Whether to disclose her finding in the auditor’s report A Simple Framework For Analyzing Ethical Issues • Identify the ethical issue • Identify the decision-maker • Identify and assess effects on the stakeholders • Diagnose the situation • Analyze and assess major alternatives • Pick the choice

  20. Conflict of interest; independence, integrity & objectivity • bribery; tax evasion…. • Whether to disclose her finding in the auditor’s report A Simple Framework For Analyzing Ethical Issues Linda • Identify the ethical issue • Identify the decision-maker • Identify and assess effects on the stakeholders • Diagnose the situation • Analyze and assess major alternatives • Pick the choice

  21. Psnl: Linda; David; Family members; Friends • Work: CPA firm and other colleagues; Mr. Wong; • Wong & Wong company and it’s employees, shareholders • Prof: Accounting profession; HKSA; other members • Govt: Legal and enforcement (IRD, ICAC) • Social: General public (Users of auditor’s report) • Psnl: Linda; David; Family members; Friends • Work: CPA firm and other colleagues; Mr. Wong; • Wong & Wong company and it’s employees, shareholders • Prof: Accounting profession; HKSA; other members • Govt: Legal and enforcement (IRD, ICAC) • Social: General public (Users of auditor’s report) • Conflict of interest; independence, integrity & objectivity • bribery; tax evasion…. • Whether to disclose her finding in the auditor’s report • Conflict of interest; independence, integrity & objectivity • bribery; tax evasion…. • Whether to disclose her finding in the auditor’s report A Simple Framework For Analyzing Ethical Issues A Simple Framework For Analyzing Ethical Issues Linda Linda • Identify the ethical issue • Identify the decision-maker • Identify and assess effects on the stakeholders • Diagnose the situation • Analyze and assess major alternatives • Pick the choice • Identify the ethical issue • Identify the decision-maker • Identify and assess effects on the stakeholders • Diagnose the situation • Analyze and assess major alternatives • Pick the choice

  22. Psnl: Linda; David; Family members; Friends • Work: CPA firm and other colleagues; Mr. Wong; • Wong & Wong company and it’s employees, shareholders • Prof: Accounting profession; HKSA; other members • Govt: Legal and enforcement (IRD, ICAC) • Social: General public (Users of auditor’s report) • How did it happen in the first place? • What could have prevented it? • Can the damage be undone? • Conflict of interest; independence, integrity & objectivity • bribery; tax evasion…. • Whether to disclose her finding in the auditor’s report A Simple Framework For Analyzing Ethical Issues Linda • Identify the ethical issue • Identify the decision-maker • Identify and assess effects on the stakeholders • Diagnose the situation • Analyze and assess major alternatives • Pick the choice

  23. Disclose her finding in the auditor’s report. • Keep the secret and help David to cover up his act by providing an unqualified auditor’s report. • Keep the secret. Ask David returning the sum to Mr. Wong and resign from Wong & Wong. • Report the fraud to the IRD, ICAC and other regulatory bodies • …………... • Psnl: Linda; David; Family members; Friends • Work: CPA firm and other colleagues; Mr. Wong; • Wong & Wong company and it’s employees, shareholders • Prof: Accounting profession; HKSA; other members • Govt: Legal and enforcement (IRD, ICAC) • Social: General public (Users of auditor’s report) • How did it happen in the first place? • What could have prevented it? • Can the damage be undone? • Conflict of interest; independence, integrity & objectivity • bribery; tax evasion…. • Whether to disclose her finding in the auditor’s report A Simple Framework For Analyzing Ethical Issues Linda • Identify the ethical issue • Identify the decision-maker • Identify and assess effects on the stakeholders • Diagnose the situation • Analyze and assess major alternatives • Pick the choice

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