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CHAPTER 2 Ethics and Professional Responsibility © 2005 West Legal Studies in Business A Division of Thomson Learning Learning Objectives • What is ethics? What is business ethics? Why is business ethics important? • How can business leaders encourage their companies to act ethically? • How do duty-based ethics differ from outcomebased ethics? • What duties do professionals owe to those who rely on their services? • What types of ethical issues might arise in the context of international business transactions? © 2005 West Legal Studies in Business A Division of Thomson Learning 2 Business Ethics • Ethics: the philosophy of morality. Morality is based on universal rules or guidelines. • Business Ethics: focuses on application of morality to business. • Conflicting Duties to various stakeholders. • Fiduciary Duties. – Time Warner Entertainment Co. v. Six Flags over Georgia, LLC (2002). © 2005 West Legal Studies in Business A Division of Thomson Learning 3 Setting the Right Ethical Tone • Importance of Ethical Leadership. • Creating Ethical Codes of Conduct. – Costco. – Clear Communications to Employees. – Johnson and Johnson: web-based ethical training. – In Re the Exxon Valdez (2004). • Corporate Compliance Programs. – Sarbanes-Oxley and Web-based reporting. • Conflicts and Trade-Offs. © 2005 West Legal Studies in Business A Division of Thomson Learning 4 Business Ethics and the Law •Relationship between ethics and law. – Historically a law was always ethical (or morally correct). – Today, obeying law does not mean an action is ethical. – An action may be legal but unethical or immoral. © 2005 West Legal Studies in Business A Division of Thomson Learning 5 Technological Developments • A company’s actions come under quick scrutiny with the power of email and the internet. • Blakey v.Continental Airlines, Inc. (2000). • When a corporation embarks on a course of business deemed “unethical” by a special interest group, the news will spread around the world in a matter of minutes. © 2005 West Legal Studies in Business A Division of Thomson Learning 6 Approaches to Ethical Reasoning • Duty Based Ethics - derived from religious and philosophical principles. – Religious Ethical Standards. – Kantian Ethics. – Rights Principles. • Outcome-Based Ethics - seek to ensure a given outcome. – Utilitarianism. © 2005 West Legal Studies in Business A Division of Thomson Learning 7 Religious Ethical Standards • The rightness or wrongness of an action is usually judged according to its conformity to an absolute rule that commands a particular form of behavior. • The motive of the actor is irrelevant in judging the rightness or the wrongness of the action. • These rules often involve an element of compassion. © 2005 West Legal Studies in Business A Division of Thomson Learning 8 Kantian Ethics • Premised on the belief that general guiding principles for moral behavior can be derived from human nature. • The categorical imperative is a central postulate of Kantian ethics. – The rightness or wrongness of an action is judged by estimating the consequences that would follow if everyone in a society performed the act under consideration. © 2005 West Legal Studies in Business A Division of Thomson Learning 9 Principle of Rights • This principle derives from the belief that every duty gives rise to a corresponding right. • The belief in fundamental rights is a deeply embedded feature of Western culture. • The ethicality of an action is judged by how the consequences of the action will affect the rights of others. © 2005 West Legal Studies in Business A Division of Thomson Learning 10 Outcome-Based Ethics: Utilitarianism • An action is ethical based on whether it produces the greatest good for the greatest number of people upon which it has an effect. • A cost-benefit analysis must be performed to determine the effects of competing alternatives on the persons affected. • The best alternative is the one that produces the greatest good for the greatest number. © 2005 West Legal Studies in Business A Division of Thomson Learning 11 Professional Responsibility • Accountant’s Duty of Care. – Audit. – Standard of Care/GAAP/GAAS. – Violations of GAAP and GAAS. • Attorney’s Duty of Care. – Liability for Malpractice. • Statutory Duties of Accountants. – Duty under Securities Laws. – Potential Criminal Liability of Accountants. © 2005 West Legal Studies in Business A Division of Thomson Learning 12 Professional Responsibility • Defying the Rules: the Enron Case. – Accounting Issues. – Off the Books Transactions. – Self-Dealing. – Corporate Culture. • Sarbanes-Oxley Act of 2002. – Public Company Accounting Oversight Board. – Applicability to Public Accounting Firms. – Auditor Independence. © 2005 West Legal Studies in Business A Division of Thomson Learning 13 Approaches to Ethical Reasoning •Duty-Based Ethics: Derived from revealed truths. – Religion: moral precepts are basis for ethics – Kantian: the “categorical imperative” – Rights: a duty cannot exist without a right. Duties must comply with natural (or fundamental) rights. © 2005 West Legal Studies in Business A Division of Thomson Learning 14 Approaches to Ethical Reasoning • Outcome-Based Ethics. – Utilitarianism (Bentham and Mill). •An action is ethical when it provides best outcome to the greatest number of people. •Requires an economic “Cost-Benefit” analysis •Critics argue that it tends to focus on society instead of individuals. © 2005 West Legal Studies in Business A Division of Thomson Learning 15 Business Ethics on a Global Level • Global company is faced with a variety of cultures, traditions and religions in the different nations it serves. – Foreign Corrupt Practices Act (1977). – Monitoring Foreign Employment Practices. • Law and the Ethical Manager: How to Create an Ethical Workplace? © 2005 West Legal Studies in Business A Division of Thomson Learning 16