1. © 2005 West Legal Studies in Business A Division of Thomson Learning CHAPTER 2 Ethics and Professional Responsibility

2. © 2005 West Legal Studies in Business A Division of Thomson Learning 2 What is ethics? What is business ethics? Why is business ethics important?What is ethics? What is business ethics? Why is business ethics important? How can business leaders encourage their companies to act ethically?How can business leaders encourage their companies to act ethically? How do duty-based ethics differ from outcome- based ethics?How do duty-based ethics differ from outcome- based ethics? What duties do professionals owe to those who rely on their services?What duties do professionals owe to those who rely on their services? What types of ethical issues might arise in the context of international business transactions?What types of ethical issues might arise in the context of international business transactions? Learning Objectives

3. © 2005 West Legal Studies in Business A Division of Thomson Learning 3 Business Ethics Ethics: the philosophy of morality. Morality is based on universal rules or guidelines.Ethics: the philosophy of morality. Morality is based on universal rules or guidelines. Business Ethics: focuses on application of morality to business.Business Ethics: focuses on application of morality to business. Conflicting Duties to various stakeholders.Conflicting Duties to various stakeholders. Fiduciary Duties.Fiduciary Duties. –Time Warner Entertainment Co. v. Six Flags over Georgia, LLC (2002).

4. © 2005 West Legal Studies in Business A Division of Thomson Learning 4 Setting the Right Ethical Tone Importance of Ethical Leadership.Importance of Ethical Leadership. Creating Ethical Codes of Conduct.Creating Ethical Codes of Conduct. –Costco. –Clear Communications to Employees. –Johnson and Johnson: web-based ethical training. –In Re the Exxon Valdez (2004). Corporate Compliance Programs.Corporate Compliance Programs. –Sarbanes-Oxley and Web-based reporting. Conflicts and Trade-Offs.Conflicts and Trade-Offs.

5. © 2005 West Legal Studies in Business A Division of Thomson Learning 5 Business Ethics and the Law Relationship between ethics and law.Relationship between ethics and law. –Historically a law was always ethical (or morally correct). –Today, obeying law does not mean an action is ethical. –An action may be legal but unethical or immoral.

6. © 2005 West Legal Studies in Business A Division of Thomson Learning 6 Technological Developments A company’s actions come under quick scrutiny with the power of email and the internet.A company’s actions come under quick scrutiny with the power of email and the internet. Blakey v.Continental Airlines, Inc. (2000).Blakey v.Continental Airlines, Inc. (2000). When a corporation embarks on a course of business deemed “unethical” by a special interest group, the news will spread around the world in a matter of minutes.When a corporation embarks on a course of business deemed “unethical” by a special interest group, the news will spread around the world in a matter of minutes.

7. © 2005 West Legal Studies in Business A Division of Thomson Learning 7 Duty Based Ethics - derived from religious and philosophical principles.Duty Based Ethics - derived from religious and philosophical principles. –Religious Ethical Standards. –Kantian Ethics. –Rights Principles. Outcome-Based Ethics - seek to ensure a given outcome.Outcome-Based Ethics - seek to ensure a given outcome. –Utilitarianism. Approaches to Ethical Reasoning

8. © 2005 West Legal Studies in Business A Division of Thomson Learning 8 The rightness or wrongness of an action is usually judged according to its conformity to an absolute rule that commands a particular form of behavior.The rightness or wrongness of an action is usually judged according to its conformity to an absolute rule that commands a particular form of behavior. The motive of the actor is irrelevant in judging the rightness or the wrongness of the action.The motive of the actor is irrelevant in judging the rightness or the wrongness of the action. These rules often involve an element of compassion.These rules often involve an element of compassion. Religious Ethical Standards

9. © 2005 West Legal Studies in Business A Division of Thomson Learning 9 Premised on the belief that general guiding principles for moral behavior can be derived from human nature.Premised on the belief that general guiding principles for moral behavior can be derived from human nature. The categorical imperative is a central postulate of Kantian ethics.The categorical imperative is a central postulate of Kantian ethics. –The rightness or wrongness of an action is judged by estimating the consequences that would follow if everyone in a society performed the act under consideration. Kantian Ethics

10. © 2005 West Legal Studies in Business A Division of Thomson Learning 10 Principle of Rights This principle derives from the belief that every duty gives rise to a corresponding right.This principle derives from the belief that every duty gives rise to a corresponding right. The belief in fundamental rights is a deeply embedded feature of Western culture.The belief in fundamental rights is a deeply embedded feature of Western culture. The ethicality of an action is judged by how the consequences of the action will affect the rights of others.The ethicality of an action is judged by how the consequences of the action will affect the rights of others.

11. © 2005 West Legal Studies in Business A Division of Thomson Learning 11 An action is ethical based on whether it produces the greatest good for the greatest number of people upon which it has an effect.An action is ethical based on whether it produces the greatest good for the greatest number of people upon which it has an effect. A cost-benefit analysis must be performed to determine the effects of competing alternatives on the persons affected.A cost-benefit analysis must be performed to determine the effects of competing alternatives on the persons affected. The best alternative is the one that produces the greatest good for the greatest number.The best alternative is the one that produces the greatest good for the greatest number. Outcome-Based Ethics: Utilitarianism

12. © 2005 West Legal Studies in Business A Division of Thomson Learning 12 Professional Responsibility Accountant’s Duty of Care.Accountant’s Duty of Care. –Audit. –Standard of Care/GAAP/GAAS. –Violations of GAAP and GAAS. Attorney’s Duty of Care.Attorney’s Duty of Care. –Liability for Malpractice. Statutory Duties of Accountants.Statutory Duties of Accountants. –Duty under Securities Laws. –Potential Criminal Liability of Accountants.

13. © 2005 West Legal Studies in Business A Division of Thomson Learning 13 Professional Responsibility Defying the Rules: the Enron Case.Defying the Rules: the Enron Case. –Accounting Issues. –Off the Books Transactions. –Self-Dealing. –Corporate Culture. Sarbanes-Oxley Act of 2002.Sarbanes-Oxley Act of 2002. –Public Company Accounting Oversight Board. –Applicability to Public Accounting Firms. –Auditor Independence.

14. © 2005 West Legal Studies in Business A Division of Thomson Learning 14 Approaches to Ethical Reasoning Duty-Based Ethics: Derived from revealed truths.Duty-Based Ethics: Derived from revealed truths. –Religion: moral precepts are basis for ethics –Kantian: the “categorical imperative” –Rights: a duty cannot exist without a right. Duties must comply with natural (or fundamental) rights.

15. © 2005 West Legal Studies in Business A Division of Thomson Learning 15 Approaches to Ethical Reasoning Outcome-Based Ethics.Outcome-Based Ethics. –Utilitarianism (Bentham and Mill). An action is ethical when it provides best outcome to the greatest number of people.An action is ethical when it provides best outcome to the greatest number of people. Requires an economic “Cost-Benefit” analysisRequires an economic “Cost-Benefit” analysis Critics argue that it tends to focus on society instead of individuals.Critics argue that it tends to focus on society instead of individuals.

16. © 2005 West Legal Studies in Business A Division of Thomson Learning 16 Business Ethics on a Global Level Global company is faced with a variety of cultures, traditions and religions in the different nations it serves.Global company is faced with a variety of cultures, traditions and religions in the different nations it serves. –Foreign Corrupt Practices Act (1977). –Monitoring Foreign Employment Practices. Law and the Ethical Manager: How to Create an Ethical Workplace?Law and the Ethical Manager: How to Create an Ethical Workplace?