2. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–2 1.Explain briefly the meaning of ethics. 2.Describe how ethics and economic progress are connected. 3.Describe briefly the function of corporate social responsibility (CSR). 4.Recount the events in some of the more famous corporate financial scandals. 5.Explain how ethics can be taught. 6.Explain how internal controls can facilitate ethical behavior and help prevent financial impropriety.

3. Philosophical Principles of Ethics Imperative Principle Do what is right. Utilitarian Principle Do what produces the greatest good. Generalization Argument Do what is right, but filter the action by consideration of the consequences. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–3

4. What Is Ethics? Ethics – The branch of philosophy that addresses the values pertaining to human behavior, with regard to the “rightness” and “wrongness” of actions and to the “goodness” and “badness” of the intent and results of such actions Integrity – Adherence to moral and ethical principles; soundness of moral character; honesty. As a practical matter, a person of integrity knows what is right and has the courage to do it © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–4

5. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–5 EXHIBIT 7.1 BASIC STEPS IN ETHICAL DECISION-MAKING 1.Define all the facts and circumstances, including who, what, where, when, and how. 2.Identify the people affected by the situation and their rights and obligations. 3.Identify the alternative decisions and consequences. 4.Make the decision: determine the right thing to do and then do it.

6. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–6 EXHIBIT 7.2 THE BBB CODE OF BUSINESS PRACTICES 1.Build Trust: Establish and maintain a positive track record in the marketplace. 2.Advertise Honestly: Adhere to established standards of advertising and selling. 3.Tell the Truth: Honestly represent products and services, including clear and adequate disclosures of all material terms. 4.Be Transparent: Openly identify the nature, location, and ownership of the business, and clearly disclose all policies, guarantees, and procedures that influence a customer’s decision to buy. 5.Honor Promises: Abide by all written agreements and verbal representations. 6.Be Responsive: Address marketplace disputes quickly, professionally, and in good faith. 7.Safeguard Privacy: Protect any data collected against mishandling and fraud, collect personal information only as needed, and respect the preferences of customers regarding the use of their information. 8.Embody Integrity: Approach all business dealings, marketplace transactions, and commitments with integrity.

7. Ethics in Business and Society For ethical business activity to occur, mutual trust, fair dealings, and honest communication are essential. Ethics and Economics – Unethical behavior (e.g., inside information) destroys fair investment markets – Commonly-shared positive ethical values regarding respect for individuals, their lives, their property, and their freedoms promote individual integrity and doing the “right thing” © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–7

8. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–8 EXHIBIT 7.3 FCPA VIOLATIONS AND CORRUPTION PERCEPTIONS INDEX FOR SELECTED COUTRIES Corruption Perceptions Index (CPI) is published each year by Transparency International, providing metrics to the potential corruption risk for 180 countries.

9. What Is Corporate Social Responsibility? Corporate Social Responsibility (CSR) – A firm’s obligations to society, including the welfare of people and places affected by its activities CSR Actions – Provide quality products or services – Engage in ethical accounting and principled business practices – Be responsible for fair treatment of employees – Meet the firm’s obligations to all stakeholders Customers, suppliers, creditors, lenders, and investors – Care for and protect the environment © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–9

10. Rules, Policies, and Guidelines Making an ethical choice: – Follow legal rules – Apply the formal ethical policies of your organization – Use your moral intuition to answer the following: What would your mother or father say if you acted in that way? How would you feel if you saw your situation described in the newspaper? Does the situation “smell bad?” Would you use your behavior as a marketing tool? © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–10

11. Making an Ethical Decision The Principle of Consistency – Considering what would be the consequences if everyone made the same choice that you are about to make. The Principle of Respect – To apply the principle of respect, you would choose the alternative or choice that treats people with the greatest respect. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–11

12. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–12 EXHIBIT 7.4 STEPS TO ENSURE INTEGRITY AT EXXONMOBIL A substantial majority of the Board of Directors are non-employees. The Board Audit Committee is empowered to investigate any matters brought to its attention and has 100 percent non-employee membership. An independent internal audit staff assesses compliance with policies and procedures, and evaluates control effectiveness in about 300 audits conducted annually around all business units. Steps are taken to assure the independence of both internal and external auditors. Employees regularly review and discuss expectations, and are encouraged to raise questions or concerns. Violations are promptly reviewed, communicated upward, and acted upon.

13. Financial Scandals: Enron Bankruptcy Enron – Was a major global provider of electricity, natural gas, pulp and paper, and communications services – Used innovative and misleading accounting in “cooking its books” to avoid disclosing unprofitable operations – Was a key event leading the U.S. Congress to pass a new federal securities law for financial accounting and reporting transparency, the Sarbanes-Oxley Act of 2002, often referred to as “SOX” © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–13

14. Financial Scandals: WorldCom Bankruptcy WorldCom – Used fraudulent accounting methods to manipulate earnings to present a false image of growth and prosperity to prop up the firm’s stock price – Underreported “line costs” as assets rather than expensing them and fraudulently overstated revenues – Internal auditors eventually discovered the fraud and the firm filed for bankruptcy protection which wiped out the investments of stock and bond holders © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–14

15. Financial Scandals: Vivendi Vivendi – Used fraudulent accounting methods for several years to hide cash flow, liquidity, and financial obligation problems to boost its apparent financial performance to enhance its stock price and make several acquisitions © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–15

16. Financial Scandals: Parmalat Bankruptcy Parmalat – Used risky derivatives and purchase of its own debt to disguise losses in several of its new international acquisitions – Was placed under control of a commissioner by the Italian government after the firm collapsed into bankruptcy when it could not pay of its debt and make its bond payments © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–16

17. Other Financial Scandals Teapot Dome Scandal – Resulted from the secret leasing of Teapot Dome oil reserves to a businessman who paid Secretary of the Interior Albert Fall hundreds of thousands of dollars in zero-interest loans Ponzi (Pyramid) Scheme – A fraud in which money received from later investors is used to provide returns to earlier investors, thus giving an appearance of a profitable investment © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–17

18. Can Ethics Be Taught? Fundamentals of Ethics Education: Personal integrity Responsibility of business in society Ethical decision- making Ethical leadership Corporate governance © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–18

19. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–19 EXHIBIT 7.5 HOW DO YOU MEASURE SUCCESS? Many people think of fame and fortune when they measure success. However, at some point in life, most people come to realize that inner peace and soul-deep satisfaction come not from fame and fortune, but from having lived a life based upon integrity and noble character. President Lincoln put it this way: “Honor is better than honors.” At a Congressional Hearing on ethics in July 2002, Truett Cathy, founder of Chick-Fil-A, quoted Proverbs 22:1: “A good name is more desirable than great riches; to be esteemed is better than silver or gold.” In the final analysis, living an honorable life really is more satisfying than fame and fortune. How do you measure success?

20. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–20 EXHIBIT 7.6 ETHICS IN BUSINESS AND SOCIETY: SELECTED QUOTATIONS “ Associate with men of good quality, if you esteem your own reputation; for it is better to be alone than in bad company.” (George Washington) “Honor is better than honors.” (Abraham Lincoln) “To educate a person in mind and not in morals is to educate a menace to society.” (Theodore Roosevelt) “A good name is more desirable than great riches; to be esteemed is better than silver or gold.” (King Solomon) “To see what is right and not to do it is want of courage.” (Confucius) ”It has become dramatically clear that the foundation of corporate integrity is personal integrity.” (Sam DiPiazza, CEO of PricewaterhouseCoopers) “A people that values its privileges above its principles soon loses both.” (Dwight D. Eisenhower)

21. Internal Controls – A system of rules and procedures designed to ensure the accuracy and reliability of financial and accounting information Internal Control Procedures – Preventing accidental errors and irregularities (intentional misrepresentations) – Identifying errors and irregularities for corrective action © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–21

22. Foreign Corrupt Practices Act Foreign Corrupt Practices Act (FCPA) of 1997 – Applies to U.S. firms and to foreign firms that engage in business in the U.S. – Consists of two parts: An anti-bribery provision A requirement to maintain an adequate internal control system over financial books and records © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–22

23. Sarbanes-Oxley Act (“SOX”) of 2002 – Increased the prison sentence for fraud to 25 years – Established 20-year sentences for destroying, altering, or fabricating records in federal investigations, or any scheme to defraud shareholders – Requires that the Chief Executive Officer and Chief Financial Officer of a publicly traded corporation must certify that its financial statements accurately presents the firm’s financial condition and results of the firm’s operations © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–23

24. Computer Security of Accounting Information Basic Threats to Computer Security – Natural disasters – Dishonest employees – Disgruntled employees – Persons external to the organization – Accidental errors and omissions © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–24

25. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.7–25 KEY TERMS ethics integrity Corruption Perceptions Index (CPI) corporate social responsibility (CSR) mark-to-market accounting Ponzi scheme internal controls Foreign Corrupt Practices Act