© 2007 by West Legal Studies in Business / A Division of Thomson Learning CHAPTER 2 Ethics and Professional Responsibility

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 2 Business Ethics Ethics can be defined as the study of what constitutes right or wrong behavior. Business ethics focuses on how moral and ethical principles are applied in the business context.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 3 Business Ethics The law reflects society’s convictions on what constitutes right or wrong behavior. Case 2.1 Time Warner Entertainment Co. v. Six Flags Over Georgia, LLC (2002).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 4 Setting the Right Ethical Tone Ethical Leadership. –Attitude of Management. –‘Looking the Other Way’. –Creating Realistic Goals. –Periodic Evaluation. –Case 2.2: In Re the Exxon Valdez.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 5 Setting the Right Ethical Tone Ethical Codes of Conduct. –Costco as an example . –Clear Communications. –Johnson & Johnson – web training.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 6 Corporate Compliance Programs The Sarbanes-Oxley Act. –Employers must set up confidential reporting and auditing systems. –Web-based system by Ethicspoint. Integrating Compliance Programs. –Ethics programs must be disseminated and coordinated among all departments.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 7 Conflicts and Trade-Offs Today’s corporate decision makers must balance profitability against ethical responsibility when making their decisions. Instead of maximum profits, corporations increasingly aim for optimum profits— profits that can be realized by the firm while pursuing actions that are not only legal and profitable but also ethical.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 8 Business Ethics and the Law Legal compliance is the moral minimum, but simply obeying the law does not mean it is ethical. Laws regulating business. “Gray” areas in the law. –Case 2.3 Guin v. Brazos Higher Education Service Corp. (2006).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 9 Approaches to Ethical Reasoning Duty-based ethics: Ethics based on religious beliefs and philosophical reasoning, such as that of Immanuel Kant. Example: Ten Commandments. Outcome-based ethics: Ethics based on philosophical reasoning, such as that of John Stuart Mill. Example: utilitarianism.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 10 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 11 Defying the Rules: The Enron Case Growth of Enron. Accounting Issues. –Fudging and ‘Anticipated’ Earnings. –Bonuses based on whether earnings were met. Off-The-Book Transactions. –Subsidiaries inflated net worth of Enron. –Most transactions occurred in Cayman Islands. Self-Dealing.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 12 Sarbanes - Oxley Sarbanes-Oxley Act of –Public Company Accounting Oversight Board. –Applicability to Public Accounting Firms. –Auditor Independence.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 13 Ethics In The Global Context Despite the cultural and religious differences among nations, the most important ethical precepts are common to virtually all countries.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 14 Ethics in The Global Context Two notable differences relate to: –The role of women in society. –The practice of giving side payments to foreign officials to secure favorable contracts. The Foreign Corrupt Practices Act of 1977 (FCPA), prohibits the bribery of foreign officials through such side payments, put U.S. businesspersons at a relative disadvantage to businesspersons from other countries who are not subject to such laws.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 15 What is considered ethical in society may change over time as social customs change and new developments alter our social and business environment. Ethics in The Global Context