CHAPTER 3

• Business ethics


  The application of ethical principles and standards in a business environment
• Business ethics is a broad discipline that attempts to address improper attitudes and actions that could be detrimental to the company, including fraudulent acts on the part of corporate officers and employees
• Business ethics seeks to achieve a corporate culture that drives people in the company to do things legally and ethically
• Stakeholders and their interests

  • Shareholders (revenues, profits, dividends, stock price growth)
  • Employees (salaries, job security, career advancement, safe working environment)
  • Creditors (loan repayment, healthy credit rating)
  • Customers (safe, durable, quality products, appropriate pricing, warranty, after-sale support)
  • Vendors (payment on goods delivered, frequent orders, sufficient profit margin)
  • Government (correct taxes paid, compliance with laws/regulations)
  • Community (employment opportunities, philanthropic activities, environmental protection)
• Negative impact of unethical acts on stakeholders

  • Shareholders (decline in revenue, profits, cash flows, stock price, bankruptcy)
  • Employees (loss of employment, job dissatisfaction, insufficient personal income)
  • Creditors (inability to collect loan, poor credit rating)
  • Customers (substandard/unsafe products, exorbitant prices, dissatisfaction)
  • Vendors (delayed payments, kickbacks/bribery)
  • Government (insufficient tax collections, increased law violations)
  • Community (lack of corporate support, job opportunities, environmental destruction)
• Illegal acts


  Actions of the corporation or its officers/employees that are contrary to prevailing laws and government regulations, carrying monetary fines and penalties
• Unethical acts


  Acts that are not prohibited by laws/regulations but are not aligned with ethical principles and standards, can result in conflicts of interest and abuses
• Conflicts of interest must be avoided as they can result in abuses and improper adjustments to the detriment of the company
• Communicating the code of ethical conduct


  1. Employee orientation programs

  2. Posting on company website

  3. Newsletters and publications

  4. Official memoranda

  5. Bulletins

  6. Employee manual
• Unethical acts in various company departments

  • Marketing (false representations, bribery, kickbacks)
  • Purchasing (conflicts of interest, favoritism, kickbacks)
  • Accounting (fraudulent reporting, misappropriation of assets)
  • Human Resources (nepotism, discrimination, sexual harassment)
  • Operations (substandard products, unsafe working conditions)
  • Sales (false advertising, bribery, price discrimination)
• Unethical acts in the various departments of the company

  • Marketing - Making false representation or improper claim about product features
  • Production - Temporary patching of defective product and hiding defect
  • Research and development - Divulging confidential product information
  • Human resource - Falsifying employee competence and qualifications
  • Internal audit - Not reporting audit findings to audit committee due to familiarity threat
  • Procurement - Procurement manager buying from own trading firm at high cost
  • Accounting - Understating bad debts expense to show high profit
• Major contents of the code of ethical conduct

  • Company profile
  • Objectives of the code
  • Ethical principles adapted
  • List of unethical acts
  • Process for identifying threats/risks of unethical acts
  • Process for determining if threats are significant
  • Resolving ethical conflicts
  • Reporting of ethical issues and concerns
  • Sanctions for violations
  • Approval of the code
• Divulging confidential information


  Corporate officers and employees prohibited from disclosing confidential information and trade secrets
• Personal use of company vehicles and equipment

  Company vehicles and equipment must only be used for official purposes
• Unauthorized commissions and consulting fees

  Payments of commissions only when duly authorized, employees cannot collect consulting fees from the company
• Conflicts of interest and outside business

  Board members with business interests in winning contracts must inhibit selection process, procurement managers cannot buy from their own firms
• Reimbursement of personal expenses

  Officers cannot submit personal expenses for reimbursement
• Prohibition on bribery


  All payments to government agencies must be evidenced by official receipts
• Resolution of ethical issues in accounting

  1. Identify the facts

  2. Identify the ethical issue

  3. Analyze alternative courses of action

  4. Make a decision
• Making accounting adjustments or reclassifications without a basis (e.g. actual transaction or accounting event) is a violation of accounting standards