Week 12 - Ethics

Question 1

What are the three sides of the Fraud Triangle? (the centre of it is ethical risk)

Answer 1

• Perceived pressure (motive) - financial or non-financial
• Rationalisation - mindset e.g. “unhappy” with the organisation
• Opportunity - access to assets and info e.g. weak internal controls

Question 2

What are the three underlying concepts of ethics?

Answer 2

• Utilitarianism - take action that maximises utility of stakeholders (maximise good, minimise bad)
• Rights - take action that does not violate the rights of others
• Justice - take action that fairly distributes benefits and burdens among members of group

Question 3

What is agency theory?

Answer 3

Agency theory is concerned with resolving problems that can exist in agency relationships due to unaligned goals or different aversion levels to risk. The most common agency relationship in finance occurs between shareholders (principal) and company executives (agents).

Agency theory addresses problems that arise due to differences between the goals or desires between the principal and agent. This situation may occur because the principal isn’t aware of the actions of the agent or is prohibited by resources from acquiring the information. For example, company executives may have a desire to expand a business into other markets. This will sacrifice the short-term profitability of the company for prospective growth and higher earnings in the future. However, shareholders that desire high current capital growth may be unaware of these plans.

Question 4

What is stewardship theory?

Answer 4

Assumes managers:

• Are ethical and trustworthy stewards rather than self-interested actors,
• Have strong sense of duty toward the organisation,
• Motivated by non-financial incentives: recognition, respect for authority, and gratification from successful performance.

Question 5

What are the five ethical principles according to the CPA and CIMA?

Answer 5

• Integrity - straightforward and honest in professional relationships
• Objectivity - no bias or conflict of interest to override judgement
• Competence and due care - knowledge and skills, act diligently in accordance with professional standards
• Confidentiality - should not use/disclose information for personal advantage
• Professional behaviour - comply with relevant laws and regulations

Question 6

What are 5 strategies for responding to ethical issues?

Answer 6

• Transparency
• Explanation
• Challenging/refusal
• Exit
• Whistle-blowing

Question 7

What does it mean by transparency? (Strategy for responding to ethical issues)

Answer 7

• Making the assumptions of an unethical decision clear

* Leaving others to decide how to manage

Question 8

What does it mean by explanation? (Strategy for responding to ethical issues)

Answer 8

• Discussing the issue

* Attempting to change unethical conduct by articulating potential consequences

Question 9

What does it mean by challenging/refusal? (Strategy for responding to ethical issues)

Answer 9

• Opposing unethical conduct

* Refusing to act unethically

Question 10

What does it mean by exit? (Strategy for responding to ethical issues)

Answer 10

Leaving an unethical organisation

Question 11

What does it mean by whistle-blowing? (Strategy for responding to ethical issues)

Answer 11

Reporting unethical conduct to an external body

Question 12

What are 5 ways to prevent unethical behaviour?

Answer 12

• Code of Conduct Document
• Strong leadership
• Reinforce consequences
• Separation of duties
• Whistleblowing policy