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SPECIAL REPORT: THE FUTURE OF ETHICS

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THE FUTURE OF ETHICS

The novelist Elie Wiesel once said that there may be times when we are powerless to prevent injustice, but there must never be a time when we fail to protest. The accounting profession needs to stand up and protest to ensure improved ethical standards, adequacy of financial management, and strengthening of governance. By Henriette Scholtz

The word ‘ethics’ is derived from the Greek word ethos, which means custom, habit, or character. Ethics is considered to be the moral principles which guide one’s behaviour, but it is not concerned with ‘feelings’. Feelings can and do often differ from what is ethical. What may be ethical for one person is not necessarily true for the next. Child labour, for example, is not illegal in China, but is unethical. The distinction between ethics and morality is that morality links to personal character and is the right and wrong of an action, while ethics is the social system in which these morals are applied. Ethics is the codes of ethical behaviour that is expected from the civilisation an individual belongs to. One of the distinctive features of a profession, such as the accounting profession, is the presence of a code of ethics for its members.

One may ask is there still a place, in today’s society, characterised by accounting scandals, which involves alleged or actual unethical behaviour for business ethics? The answer may be surprisingly yes, based on a survey conducted by the Ethics and Compliance Initiative in the US in 2013 which generates the US benchmark for ethical behaviour in companies. The survey interviewed 1 600 employees from large US companies.

According to the survey, companies with strong ethical cultures have increased from 60% in 2011 to 66% in 2013. The percentage of companies providing ethics training increased from 74% in 2011 to 81% in 2013. Two-thirds of companies surveyed indicated that they included ethical conduct as a performance measure and 74% of companies reported ethical misconduct internally.

Observations regarding serious misconduct like falsifying financial information and reports occurred less in 2013. The percentage workers observing misconduct in the work place dropped from 55% in 2007 to 41% in 2013. The pressure to compromise standards was also down, from 15% in 2011 to 9% in 2013.

Trends identified by the survey indicate that there are usually patterns of misconduct which involves continuous ongoing unethical behaviour, rather than a once-off incident.  It was also indicated that managers, those appointed to oversee people and internal control, are responsible for up to 60% of misconduct in the business place. Twenty-one per cent of workers who reported misconduct were punished for the reporting, while 34% feared retaliation and thus did not report misconduct.

Ethical behaviour has moral as well as bottom-line implications for businesses. Some of the reasons companies would wish to conduct business more ethically are to protect a company’s brand and reputation, followed by the desire to ‘do the right thing’. Globalisation could also be a reason for more ethical behaviour, as it will result in a more competitive environment making the establishment of firm-wide ethical cultures and standards more complex.

Some of the factors which could cause business ethics to be compromised are pressure to meet unrealistic deadlines or business objectives, the increase in corporate social responsibility, and environmental challenges. The recent Volkswagen debacle involving the installation of cheat software in diesel vehicles to pretend that the output of polluting nitrogen oxides was  within the legal limits is an example of this.

The ethical cultures management can install are given in table 1 and advantages of ethical companies in table 2.

The survey also showed that in large companies investing resources in ethics and compliance, compared to large companies without an effective ethics programme, the pressure to compromise standards decreased from 23% to 3%.  Observed misconduct decreased from 62% to 33%. Reported misconduct increased from 32% to 87% and retaliation experienced by employees who reported misconduct decreased from 59% to 4%.

Ethics need to be an organisational priority. It is no longer a luxury or an option. In today’s society and age, people at all levels need ethical values more than competence, experience, intelligence and drive. Who better than the accounting profession to take the lead and set the example by doing business ethically?

SOURCES

American Management Association. 2014. Business ethics today and tomorrow. Available at www.amanet.org (accessed 25 February 2016).

Brimmer, S.  2007. The role of ethics in the 21st-century organisations. Available at www.regent.edu (accessed 26 February 2016).

Ethical and Compliance Initiative. 2013. National Business Ethics Survey. Available at www.ethics.org (accessed 25 February 2016).

Hill, B. 2016. The advantages of ethical behaviour. Available at www. smallbusiness.chron.com (accessed 25 February 2016).

NDTV. 2016. Volkswagen faces huge US lawsuit over pollution cheating. Available at www.ndtv.com/world-news/volkswagen-faces-huge-us-lawsuit over-pollution-cheating-1280969 (accessed 26 February 2016).

AUTHOR | Henriette Scholtz CA(SA) is a Senior Lecturer in Auditing at the University of Stellenbosch and a member of the SAICA Ethics Committee

 

ETHICS & CORPORATE GOVERNANCE

Ethics has become a permanent and prominent feature of corporate governance in South Africa. According to the King Report on Corporate Governance, there are three key responsibilities that directors, collectively and individually, must discharge with regard to ethics. By Deon Rossouw

Ethics has become a permanent and prominent feature of corporate governance in South Africa. This growth in prominence can be traced through the three versions of the King Codes of Governance for South Africa. Whereas the First King Report (1994) addressed the topic of ethics almost as an afterthought in one of the last chapters, the Third King Report (2009) started with a chapter on ‘Ethical leadership and corporate citizenship’. This prominent positioning of ethics in King III reflects a growing recognition that ethics is indeed the foundation of good governance. It would not surprise if the Fourth King Report that is due for publication in 2016 continues to provide similar prominence to ethics.

Business ethics is defined as follows in King III: ‘Business Ethics refers to the ethical values that determine the interaction between a company and its stakeholders.’ Business Ethics is thus about the ethical standards adopted by a company to guide staff on how they should behave towards one another and in their daily operations, but also how they should behave in their interactions with external stakeholders such as clients, suppliers and communities.

There are three ethical responsibilities that directors, collectively and individually, must discharge with regard to ethics.

ETHICAL DUTIES OF DIRECTORS

First, individual board members have to accept that they have a set of basic ethical duties to the company over and above their other responsibilities as directors. It is impossible to discharge one’s duties as a director if one does not fulfil these ethical obligations towards the company.

These ethical duties include the commitment of directors to always act in the best interests of the company and to avoid conflicts of interest that might detract them from doing so. Furthermore, these duties also include the ethical obligation to consider the legitimate interests of stakeholders, the responsibility to acquire the required knowledge and competence needed to fulfil one’s duty as director, and to act with ethical courage in board deliberations and decisions.

These ethical duties of directors are discussed under the first principle of the Third King Report: ‘The board should provide effective leadership based on an ethical foundation.’

ETHICAL DUTIES TO SOCIETY

The second ethical responsibility of directors is to ensure that the company acts as a responsible corporate citizen. The board has to ensure that, at a minimum, the company has no negative impact on society and the environment –and, if possible, a positive one. This governance duty is captured in Principle 1.2 of King III that states that ‘The board should ensure that the company is and is seen to be a responsible corporate citizen.’

The responsibility of the board to ensure that the company acts as a responsible corporate citizen was given statuary status with the Companies Act (2008) that requires certain categories of companies to have a mandatory social and ethics sub-committee of the board. The prescribed mandate of this committee compels the committee to monitor and report on the impact of the company on the economy, the workplace, society and the natural environment.

Whereas the Companies Act compels companies to monitor and report on their corporate citizenship, the King III Report reminds companies that it is in the interest of their own sustainability to do – so businesses need to build relationships with their stakeholders in society and depend on society’s health and the health of the natural environment to be sustainable.

GOVERNING THE ETHICS OF THE CORPORATION

The third governance responsibility that relates to ethics is probably the most demanding of the three responsibilities of the board regarding ethics. This responsibility relates to the obligation to ensure that the company integrates ethical standards into the way it operates. This responsibility is captured in Principle 1.3 of the King III Report that states: ‘The board should ensure that the company’s ethics is managed effectively.’

This is a much more ambitious target than simply developing a code of ethics and implementing a whistle-blowing line. It requires the commitment of the board and the CEO to the company’s ethical standards, but also their oversight and strategic guidance of the ethics of the company. In addition, it entails that the board must ensure that there are effective ethics management processes in place as well as competent people to run them. The purpose of such an ethics management process is to ensure that staff, but also the company’s supply chain, are familiar with and adhere to the company’s ethics.

The governance of ethics furthermore entails that the internal audit function of companies should assess the adequacy and effectiveness of ethics management processes and systems, and also that the ethics performance of the company is reported to stakeholders through integrated reporting.

The governance of corporate ethics as recommended in the King III Report has unfortunately not been included in the mandate of the social and ethics committee as prescribed in the Companies Act (2008). Many leading companies have however since corrected this oversight by expanding the mandate of the social and ethics committee to also include the strategic oversight of the ethics of the company in the mandate of the committee.

CONCLUSION

The Third King Report on Governance for South Africa, in combination with the social and ethics committee requirement of the Companies Act (2008), has created conditions within which the ethical dimension of corporate governance enjoys greater recognition in South Africa than in most other jurisdictions. King IV is likely to provide further impetus to the prominence of ethics in corporate governance in South Africa.

SOURCES

Companies Act (Act 71 of 2008). Available at: http://www.justice.gov.za/legislation/acts/2008-071amended.pdf

Companies Act Regulations (2011). Available at: http://www.justice.gov.za/legislation/acts/2008-071-reg.pdf

King Committee on Corporate Governance. 2009. King Report on Corporate Governance for South Africa 2009. Johannesburg: Institute of Directors in Southern Africa.

Rossouw, D. 2012. The Social and Ethics Committee Handbook. Pretoria: The Ethics Institute of South Africa.

AUTHOR | Deon Rossouw CD(SA) is the CEO of the Ethics Institute of South Africa and Extraordinary Professor in Philosophy at the University of Stellenbosch. He currently serves on the main committee of the Fourth King Report on Corporate Governance for South Africa

 

DEFINITION OF ‘ETHICS’ DECONSTRUCTED

Malesela Les Montja believes that ethics are more important today than ever before and that its importance in the business world will increase exponentially in future

Generally speaking, ethics or moral philosophy is a collective of philosophical principles that include defining, defending, and recommending concepts of that are considered right and wrong behavoiur. While SAICA’s Code of Professional Conduct (CPC) does not specifically define ‘ethics’ or ‘professional ethics’, it establishes, in part A of the code, fundamental principles of professional ethics for chartered accountants. The CPC provides a conceptual framework that chartered accountants need to comply with. In parts B and C of the CPC,  the conceptual framework outlined in part A of the code is explained and guidance provided as to how the fundamental principles should be applied in various situations.

What the CPC aims to achieve is to inculcate a culture of high moral standards among all SAICA members and associates. In the fast-pace, headline-grabbing and often opportunity-seeking world of business and politics we live in today, it is the duty of professional bodies such as SAICA to play the role ‘guardian angel’ to its members, who invariably encounter threats that may impede their ability to comply with the fundamental principles of professional conduct.

IMPORTANCE OF ETHICS TODAY

Are ethics important in today’s world? Absolutely!

Speaking of fundamental principles (the very principles –not rules–outlined in the CPC):  one has to ask whether these sufficiently guard SAICA’s mantra of ‘integritas’. Yes, integrity is the first and one of the five fundamental principles of the CPC. But do members truly bear these in mind when they are faced with ethical dilemmas? Is this an ‘oath’ that is engraved in the very core of our beings as chartered accountants? Should SAICA not perhaps look at requesting – like most audit firms do – members to declare annually their allegiance to the fundamental principles of the CPC? It is more important than ever for ethics to make up the DNA of a chartered accountant or any other professional or business person, both in the public and private sectors. The moral degeneration of our society and corrupt practices in both private and public institutions make a compelling case that ethics, more than any other moral principle, demands our attention. Our ethical standards – and most importantly, integrity – as professionals are constantly being brought into the spotlight. Actions of both civil servants and corporate professionals are questioned on a regular basis. Technically speaking, if an individual (in this case, a chartered accountant) applies for a job which he or she knows, either he or she doesn’t qualify for (be it for lack of qualifications or experience; the latter being debatable) or lack the aptitude to learn and adapt the core skills required for the job, that individual would have breached the fundamental principle of ‘professional competence and due care’.

Business transactions are increasingly being conducted  on virtual platforms. Because the human touch in such transactions and related services has diminished over time, it is critical for professionals to apply their minds when they are faced with ethical dilemmas.

THE FOCUS OF ETHICS

Ethics in business can be focused on large or small businesses or government.

Corporates (big or small) and the public sector (government) grapple with ethical misdemeanours almost on a daily basis. What constitutes ‘business networking’ and what would be considered ‘bribery’? When clients are hosted as VIPs and VVIPs at high-end sporting events and/or gala dinners, is that showing client appreciation or enticing clients to act in a certain way and therefore provide more opportunities to the host’s business? Is that different to paying the client the cash equivalent of the VIP sporting event/gala dinner ticket and expect them to give you more business?

These are just some of the ‘threats’ to compliance with the fundamental principles of the CPC that SAICA members have to deal with, both in the private and public sector.

ETHICAL DILEMMAS FACED BY EMPLOYEES

Sustainability of a business (private or public) or an NGO or NPO requires individuals with a high level of ethical standards. In the movie Wall Street, Gordon Gekko says, ‘Greed is good’. But greed is the enemy of ethical standards. There is a thin line between ambition and greed. As some of us strive to make a success of our lives, both professionally and at a personal level, we often push boundaries to get to where we believe we should be. Networking or ‘entertaining’ clients often involves the question of greed versus ambition. If, for example, an employee of Company A makes an acquaintance of a client (Company B) but the relationship goes beyond discussing corporate business matters and more towards offering other ‘professional services’ to the individual concerned (Company B’s representative), and not in their capacity as an official (for example, the CFO of Company B) but rather as a third party – will that be considered being ambitious or is it greed?

Of course there is ‘restriction of trade’ and other employment contract policies such as being prohibited from ‘working/competing against your employer’ that need to be considered, but almost invariably what would be requested by the client (as per the above example) would not be considered viable/profitable business for larger institutions. This may sound like I’m justifying the situation, but the reality is that these instances do happen more often than not and quicker than an update of the CPC could be drafted.

C S Lewis once famously wrote: ‘Integrity is doing the right thing, even when nobody is watching.’

SAICA as an organisation prides itself on its high ethical standards. It is hoped that its members are living up to these standards.

AUTHOR | Malesela Les Montja CA(SA) is  an analyst at the Diversified Finance Division of Nedbank Corporate and Investment Banking

COMMERCE WITHOUT MORALITY

In the workplace, it is easy to find oneself in a moral dilemma without even realising how you got there. By Meenesh Hira

The workplace – like a home – can be made up of various different facets. The industry, management, shareholders, colleagues and consultants all play a role in making up the culture you find yourself working in every day. A good fit often makes it a pleasure to wake up and go to work in the morning.

With the volatile economy and ever-changing market place, organisations can easily find themselves in difficult situations. It is said when the end is near, all faculties of discrimination between right and wrong are lost. As an employee of an organisation, you may even find yourself being asked to pass an unusual journal entry without having being given any explanation or justification. When enquiring about it, you receive the cold shoulder. This results in profits being manipulated to display different results depending on the users they are being presented to. For instance, management accounts are adjusted to a loss-making position when used for tax purposes and adjusted favourably when shown to the board or shareholders. You may be intimidated to speak to your business unit leader or CFO as they are the perpetrators and could cost you your livelihood.

Alternatively you may be aware of a weak treasury control which allows for certain staff to steal funds without anyone else becoming aware. You know they are struggling financially and don’t want to cause a stir. Alternatively you know the CFO is enjoying the perks of the weak control too but there is no way to deal with this one as he is the primary decision-maker in your employment position. You also notice that the CFO and CEO never book their leave with HR when they take it. They however often have long accumulated leave owing to them paid out.

You may also have become aware of a long time friend who is the head of procurement and obtains undisclosed kickbacks or that he negotiates embedded bribes in his purchase deals. You may receive instruction to write off inventory which you know has been sold but the funds pocketed.

Over time, you gradually learn about all these events that take place at work. You suppress your initial inclination to be a whistleblower with the reasoning that the impact cannot be too big if the entity is still liquid. Salaries are still being received and even though VAT returns are manipulated to indicate a smaller than actual net payable amount, they still get paid on time.

Creditors wait a bit longer than they should and are often given an excuse for late payment but avoiding those gets easier.

The more you think about it as time passes, the harder you find it to stop thinking about it. You realise there’s a lot more going on than you initially realised:

  • The Receiver of Revenue is being underpaid owing to fraudulent accounting.
  • Shareholders are losing out on their investment as a result of misappropriation of funds.
  • Bank covenants are not being met nor picked up by the bank, owing to manipulated reports.
  • The general leak of net profit causes the company to constantly break even or make losses which means salaries will never increase significantly as it will not be justified by the bottom line.

Suddenly you realise that keeping silent about the antiques at work does not allow you to sleep at night even though you have done nothing other than follow orders. You always feel on edge due to the looming reality.

You are unable to just accept things any longer and ponder about doing something but stop yourself when you realise that you will be dismissed long before things come clean. Your last option is to leave but then you have the dilemma of not earning a salary with a family to support.

Being silent is not necessarily the correct option. One Ms Vinson, an employee in the international accounting division at WorldCom, had a reputation for being hard working and diligent. In the mid-2000s she received a request from her boss to dip into a reserve account and use US$828 million to reduce expenses and thereby increase profits. She was shocked at the request, especially because the amount was so material and the transaction was not proper. She went along, however, but could not avoid the feelings of guilt and planned to resign.

The CFO persuaded her to stay while her husband urged her to quit. As the family’s larger financial contributor and the fear of entering the job market at her age, she decided to stay. The request for fraudulent entries continued, which she kept processing. Her anxiety, sleepless nights and weight loss increased similarly.

Eventually things caught up with WorldCom and Ms Vinson eventually pleaded guilty to two criminal counts of conspiracy and securities fraud, charges that carry a minimum sentence of 15 years in prison. She was also charged with breaking Oklahoma securities laws by entering false information on company documents, which has a potential ten-year prison sentence.1

Most companies have anonymous ethics hotlines that you can use. Alternatively, do the right thing because in the long run, a lot more than just your job is at stake. Your personal well-being, sanity, health, reputation and conscience are all on the line.

NOTE

1 Accountant falsifies accounts for bosses at WorldCom, in Hayes et al, Principles of auditing – an introduction to international standards on auditing.

AUTHOR | Meenesh Hira CA(SA) is an audit manager at Deloitte

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