EC7095 Financial Statement Analysis Lecture 9

Recap – lecture 8 Business valuations EMH Asset based Dividend based Earnings based Post merger strategies Defensive tactics Finance for takeovers

Ethics A set of principles that guide behaviour Not the same thing as law or regulations Ethical behaviour is seen as the highest level of behaviour that society expects – goes beyond the law Morals (personal beliefs)differ from ethics (views of an organisation that you belong to) Honesty, integrity and openness (Aristotle)

Examples Are the following people behaving ethically? 1. Mr A claims unemployment benefit but also works part time 2. An airline pilot risks an emergency landing in severe bad weather for a passenger who is gravely ill and will die if not treated very soon 3. Mrs B wins the lottery and decides to keep all of the winnings for herself and not share them with her family

Ethics in business The application of ethical values to business behaviour Based on norms and standards of behaviour Implied and explicit Many “dilemmas” due to profit motive

An issue of trust Can we trust companies? Especially since the 1980’s trust has been disintegrating – (Barings Bank, Polly Peck, Maxwell, Worldcom, Enron etc) Development of ethical strategies and policies

Accountants and Ethics The accountancy profession has developed a code of ethics that all accountants are bound by. Ethical matters may be a matter of law or regulation Upholding standards protects the reputation of the profession An accountant’s ethical behaviour serves to protect public interest (the collective wellbeing of the community) Need to keep up to date!

7 principles of public life Selflessness Integrity Objectivity Accountability Openness Honesty Leadership

Codes of conduct Compliance based Ethics based

Compliance based approach Advantages Disadvantages Rules are specific to each circumstance Encourages a consistent application of the rules Rule breaches are clearly identifiable Lengthy rule books Members cannot learn every rule Members act like robots just following a set of rules

Ethics based approach Advantages Disadvantages Encourages members to be proactive Treats members as professionals Suitable for all complex situations – rules may not cover all cases Harder for members to find a way round the rules Can be a matter of interpretation leading to lengthy, complex hearings Potential for inconsistency Ambiguity can lead to confusion General guidelines may become detailed rules over time

Differences in approach CHARACTERISTIC COMPLIANCE-BASED ETHICS-BASED Enforceability Mandatory Discretionary

Differences in approach CHARACTERISTIC COMPLIANCE-BASED ETHICS-BASED Enforceability Mandatory Discretionary Choices Obey/Disobey Judgement

Differences in approach CHARACTERISTIC COMPLIANCE-BASED ETHICS-BASED Enforceability Mandatory Discretionary Choices Obey/Disobey Judgement Standards Explicit Implicit

Differences in approach CHARACTERISTIC COMPLIANCE-BASED ETHICS-BASED Enforceability Mandatory Discretionary Choices Obey/Disobey Judgement Standards Explicit Implicit Motivation Fear Driven Values driven

Differences in approach CHARACTERISTIC COMPLIANCE-BASED ETHICS-BASED Enforceability Mandatory Discretionary Choices Obey/Disobey Judgement Standards Explicit Implicit Motivation Fear Driven Values driven Approach Law based Principles based

Differences in approach CHARACTERISTIC COMPLIANCE-BASED ETHICS-BASED Enforceability Mandatory Discretionary Choices Obey/Disobey Judgement Standards Explicit Implicit Motivation Fear Driven Values driven Approach Law based Principles based Objective Detection Prevention

Differences in approach CHARACTERISTIC COMPLIANCE-BASED ETHICS-BASED Enforceability Mandatory Discretionary Choices Obey/Disobey Judgement Standards Explicit Implicit Motivation Fear Driven Values driven Approach Law based Principles based Objective Detection Prevention Measure Rules Principles (values)

Developing an ethical code Communication Consistency Risk reduction Compliance with corporate governance rules

Key terms Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour

Qualities of an accountant Personal Professional Reliability Responsibility Timeliness Courtesy Respect Independence Professional scepticism Accountability Social responsibility

Consequences of unethical behaviour Job Profession Society

Ethical dilemmas Where two ethical values seem to be incompatible Not same as a conflict of interest Statutory obligations Contractual obligations

Resolving conflict Transparency Effect Fairness

Corporate governance The system by which organisations are directed and controlled Effective controls Accountability

Causes of poor corporate governance The agency problem Shareholder activism

The need for greater corporate governance Increasing internationalisation and globalisation Financial reporting issues Corporate scandals

The Cadbury Report (1992) Non-executive directors Nomination committee Service contracts should be limited to 3 years Remuneration committee Audit committee Chairman ≠ Chief Executive

Symptoms of poor corporate governance Domination by a single individual Lack of involvement of board Lack of adequate control function Lack of supervision Lack of independent scrutiny Lack of contact with shareholders Emphasis on short term profitability Misleading accounts and information