1. EC7095 Financial Statement Analysis
Lecture 9

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

3. 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)

4. 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

5. 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

6. 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

7. 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!

8. 7 principles of public life
Selflessness
Integrity
Objectivity
Accountability
Openness
Honesty
Leadership

9. Codes of conduct
Compliance based
Ethics based

10. 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

11. 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

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

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

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

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

16. 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

17. 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

18. 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)

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

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

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

22. Consequences of unethical behaviour
Job
Profession
Society

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

24. Resolving conflict
Transparency
Effect
Fairness

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

26. Causes of poor corporate governance
The agency problem
Shareholder activism

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

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

29. 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