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

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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 DilemmaLinda 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.

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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 othersDesire 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

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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….

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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

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:1. Fear of punishment:

Respond to rules and labels of “good” and “bad” in terms of authority figures

2. 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.

3. Desire for approval by peer group: Emphasizes others rather than him/herself

Moral Development Of The Decision-Maker

Six stages of moral development:4. Sense of duty to obey laws:

Duty and maintaining the social order become the focal points => duties to society as a whole

5. Obeying laws while preserving individual rights: Upholding the basic rights, values, and legal

contracts of society

6. 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

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Stakeholders And Their Influences

• Owning a vested interest or a stake in the ethical decision

• Primary versus secondary

• Categorizing Stakeholders: GovtSocial

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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 ?

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•Assessing the influences from stakeholders

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•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


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Stakeholders And Their Influences

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•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 …



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•Professional bodiese.g. licensing and disciplinary mechanisms, standards, guidelines and statements, quality review system …

•Other memberse.g. exercising mutual influences

•The publice.g. ability to withdraw public trust


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•Major influences : Laws and regulations

e.g. Companies Ordinance

Prevention of Bribery Ordinance

Companies (Amendment) Bill 1991

Insider Dealing Ordinance

•Governing not only accountants


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•A range of environmental stakeholders e.g. society, local communities, neighbours and citizens

•Generally accepted moral principles


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•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

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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 costsRights : Respecting stakeholders’ rightsJustice : Fair distribution of costs and

benefits among stakeholders Need to prioritize different concerns

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Standards Of Behaviour as Benchmarks

Alts ???

Society’s moral principles and values

Trade / profession-related codes

Corporate culture / code of conduct

Decision-maker’s own values and beliefs

Government laws and regulations

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Temptations To RationalizeUnethical Alternatives

The essence of rationalization : Acceptance of making unethical decisions

Typical rationalizations o e.g. within reasonable ethical and legal

limitso In the best interests of otherso The alternative is safeo Superiors’ unethical instructionso Fear to loosing jobs….

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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

•Conflict of interest; independence, integrity & objectivity

bribery; tax evasion…. •Whether to disclose her finding in the auditor’s report

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Linda

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Linda

• 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)





Linda



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Linda



• How did it happen in the first place?• What could have prevented it?• Can the damage be undone?

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Linda



• How did it happen in the first place?• What could have prevented it?• Can the damage be undone?

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…………...

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

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