DEONTOLOGICAL AND UTILITARIAN CONSTRUCTS FOR RESOLVING ETHICAL ISSUES (Anticipatory Ethics)

DEONTOLOGICAL AND UTILITARIAN CONSTRUCTS FOR RESOLVING ETHICAL ISSUES(Anticipatory Ethics) OrWHAT, ME WORRY?By Art Hayes BOSTON AGA CHAPTER JANUARY 23, 2014

"For that which is common to the greatest number has the least care bestowed upon it. Every one thinks chiefly of his own, hardly at all of the common interest; and only when he is himself concerned as an individual. For besides other considerations, everybody is more inclined to neglect the duty which he expects another to fulfill; as in families many attendants are often less useful than a few. Each citizen will have a thousand sons who will not be his sons individually, but anybody will be equally the son of anybody, and will therefore be neglected by all alike.” —From Aristotle's "Politics", Written c.a. 350 BC

My work is important because . . . . • My staff’s work is important because . . . . • My efforts are valuable because . . . . • The efforts of my staff are important because . . . . • Their time is as valuable as mine. • Late to meetings? • Deterrence—Do we keep mopping up the floor like crazy, or just turn off the faucet?

Two things are necessary to be successful— • 1. • 2.

Query: can you “learn ethics” in this course? • Probably not? Actually, hopefully not!! It is a little late for that!!

What was the last ethical issue your office faced? • How did it arise? • How was it identified? • How was it resolved (process)? • What was the resolution? • Why did you not see it coming? • Why did your then current policies and procedures not cover it? • Did it violate then current policies and procedures? • Did you amend your policies and procedures as a result? • Point—Ethical issues are like Fraud! Auditors/managers do not always see fraud, recognize its signs/clues! • What were you doing on September 10, 2001?

WHAT IS THE REAL MOMENT OF DECISION-MAKING REGARDING ETHICS? • The moment you take that first shortcut? • The moment you realize that you may not be able to control the situation? • The moment you let someone do something they can hold against you? • The moment you do something that can be held against you? • The moment you first think about doing something wrong?

RECOGNIZING THAT YOU ARE IN AN “ETHICALLY CHALLENGED” ENVIRONMENT • Bad Signs • The firm/organization has its own legal department for handling “unfounded allegations of corruption” • The firm/organization has hired a vice-president for ethics, shortly after a series of well-publicized scandals • The firm/organization has a real vice president!! • Your hear jokes about the way the firm/organization pulled a fast one on the competition and no one is the wiser

You hear things like: • Everybody else is doing it • That’s the way they do it at _____. • We will be re-examining our policies in an effort to avoid any confusion that might result. • It is important to understand that the items currently questioned, all taken together, have an insignificant impact on our indirect cost rate. • We actually undercharge what we could to precisely allow for errors and allowances. • Who’s to know? • If we don’t do it someone else will • This really doesn’t hurt anybody • They have insurance to cover things like this • Pilferage and the warehouse

It’s like their cash surrender value • I was just following orders • These silly rules!! They just aren’t fair!! • Who came up with these things, anyway? • When I think of all that I have done for the company... • Other companies dilute their products as well • Our products are still safe for human consumption • It’s just an error in judgment • (Beech-Nut Orange Juice)

THIS YOUR SEMINAR. • What do you want to cover? • Index cards. • HOW WOULD YOU LIKE TO DESIGN THE COURSE?

NUTSHELL/CLIFFNOTES VERSION • 1. Issue recognition • 2. Figuring out the right answer • 3. Having the guts to do it (Snipers)

So what is the goal and purpose of this class? • 1. Give you a framework for dealing with ethical dilemmas • 2. Improve your ability to identify ethical dilemmas • In particular give you examples of some ethical dilemmas you are likely to face in your career an accountants, in the context of ethical standards and scenarios • 3. Provide you with suggestions for addressing ethical issues as staff and as management

WHY ARE ETHICS IMPORTANT? • TRUST—the basis of all relationships! Organizations/systems • It depends on consistency in decisions. Not a case-by-case relativism. • Business has to trust government to be the referee. Our economy depends on fairness. The foreign Corrupt Practices Act—makes it hard on the U.S. companies not giving bribes overseas. Courts are essential.

ETHICSThe discipline dealing with what is good and bad and with moral duty and obligation. A set of moral principles or values. A theory or system of moral values. The principles of conduct governing an individual or a group.

Greek—Ethos—Character • Ethical—Conforming to accepted professional standards of conduct. • —Webster • Ethics—Of or relating to moral action, conduct, motive or character. Containing precepts of morality. Professionally right or befitting. • —Black’s Law Dictionary

Canon—A law, rule, or ordinance in general, and of the church in particular. • Code of Professional Responsibility (for lawyers). The canons of the Code of Professional Responsibility are statements of axiomatic norms expressing in general terms the standards of professional conduct expected of lawyers in their relationship with the public, the legal system and the legal profession.

Fiduciary—the term is derived from the Roman law and means a person holding the character of a trustee, or a character analogous to that of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires. • A person having the duty, created by his undertaking, to act primarily for another’s benefit in matters connected with such undertaking. • Moral—Of or relating to principles of right and wrong in behavior. Sanctioned by or operative on one’s conscience or ethical judgment.

SYNONYMS— • Moral • Ethical • Virtuous • Righteous • Noble

WHAT GOES WRONG?HOW DOES IT GO WRONG? • Smart people do very stupid things. Why? • Rational Lies • Temptation • Quick/snap decisions • Bad intentions • Cocky/over-confident (I can control it) • Short-sighted (Duh, I didn’t think about that) • Gullible • Moral relativism • Peer Pressures • Ambition

OTHER PRESSURES ON ETHICAL THINKING AND BEHAVIOR • Fear of Failure • Fear of disappointing others • UnsharableProblem(s) • Carelessness • Insensitivity • Ignorance of the rules • Disregard for the rules • Weighing out options • What keeps us honest?

Stops us from looting? • Something to lose • Consequences!! • Limitation of scope • Turbulence is always unexpected! • The Norlands audit case/materiality • Tortoise and the Hare • Shooting Stars fall, too. • Most quid pro quos involve little real money • But then you owe them

Common ethics survey findings • 1. Only one manager in a corporate setting actually tried to make use of a code of ethics or any other ethics devise • 2. Some companies link ethics with commandments: Be loyal and perform well! • 3. Senior managers forget what life is about in the trenches • a. They are detached from day-to-day ethical issues • b. They become jaded as their careers advance • 4. Company executives are out of touch on ethical issues • 5. Organizational pressures lead people to be unethical by doing the “easier wrong” rather than the tougher right • 6. Whistleblowing is a professional hazard. Whistleblowers are hung out to dry. People who encourage it back off during investigations

7. The majority of managers fear repercussions from doing the “right thing” • 8. Sleazy behavior does not hurt, and even seems to accelerate career advancement • 9. Many managers received explicit instructions from middle managers to do things that were unethical or illegal • a. Falsify calculations of rate of return on new investments • b. Overlook kickback schemes • c. Overlook safety defects in products • d. Ship products that do not meet customer specifications • e. Find ways to fire employees • f. Acquiesce in cover-ups involving sexual harassment • G. Ship items not ordered at year end

Honesty And Fraud in the Accounting Environment • A matter of trust • Essential element of accounting • A guarantor of the truth • Reliability • Fraud • Deceit • Cheating • Surprise • Trick

Cunning • Unfair • Unjust advantage • Immoral • May be perpetrated within an entity • For or against the entity • Management or lower level

Desirable Procedures to Support An Ethical Culture • A highly ethical tone at the top • Viable and known codes of ethics • Procedures in place to resolve ethical issues • An ethics officer or ethics committee • Ethics hotline staffed with objective listeners • Regularly scheduled training programs for officers and employees • Certification of the code of ethics by officers • An ethical culture that supports taking the right action and encourages reporting unethical practices • Positive and supportive treatment of whistleblowers

Ways to Avoid Problems • 1. Create a situation in which employees feel they can admit openly to problems • their superiors respect them • they can take some risks • they have good expectations of how they will be treated should difficulties arise or their proposed plan of action fails to meet expectations • 2. Be accessible to employees and to the media • 3. Create important interrelationships between business performance and corporate ethics • 4. Recognize the dangers surrounding poor performance • 5. Recognize the dangers in times of significant organizational and strategic changes • 6. Recognize the dangers of encouraging highly innovative and bold strategic moves • 7. You want a creative firm

BUT consider the benefit of certain organizational processes to encourage innovative thinking • use of teams • appropriate measures of performance • rewards for success • 8. Hire smart and competent people • 9. Predispose your firm to be supportive and cooperative, not subject to internal suspicion, petty politicking and strife

10. Realize these matters will not just happen spontaneously • 11. Do not orientate your ethical efforts solely toward individual actions, but also include the entire organizational context, along with the actions of individuals • 12. Do not focus on a problem-solving approach • avoiding problems is just as much a challenge as dealing with problems already at hand • 13. Do not focus on only dramatic problems, occurring at times of incredible pressure or temptation • these will be read about in the newspaper • your business ethics should relate to everyday actions and not just major ethical dilemmas • 14. Do not focus ethics efforts just at the senior manager level • people throughout the firm must be significantly involved in shaping ethical thinking • 15. Let moral principals provide standards, but do not overlook the wisdom of practical experience in making decisions

16. Be sensitive to those “minor” ethical issues which might not be recognized • employees resenting the way they are treated • employee cynicism about management’s intentions • 17. Do not treat ethics as a best Sunday dress, something to be used only on special occasions • 18. Reward difficult decisions that are beyond the letter of the law • the decision to rework an order because of marginal quality, even if the • defects might not be noticeable • affects the relationship with the customer • also affects the way the employees feel about the firm’s commitment

19. Do not expect that taking this approach to more sensitivity to ethical problems will be easier in the short run!!! • but it can become habitual and natural • 20. Recognize the dangers involved in decentralized operations • 21. Recognize the dangers in entering unfamiliar business waters • international operations • a new technology • consider turning to firms and individuals who have been successful in such circumstances for advice

22. Do not think your firm can survive without any ethical misconduct of one kind or another!!! • every firm has ethical shortcomings, breakdowns or confrontations!!! • human weakness • the inherently perplexing nature of some ethical situations • the emergence of unanticipated ethical issues • strive to minimize them • in frequency • in severity

23. The two main principals in dealing with ethical issues are: • avoid ethical problems whenever possible • deal effectively with those that arise • 24. Try to be very good at encouraging ethical behavior and discouraging unethical behavior • 25. Try to develop an ability for recognizing and acknowledging the moral difficulties your firm faces and an ability to respond appropriately • 26. When there is an ethical problem • make every effort to satisfy all parties concerned, if not totally, at least as a best possible solution • reflecting a diligent and fair-minded effort

27. Recognize that contentious ethical problems actually provide a litmus test of management’s ethical resolve • do not demonstrate an inability or unwillingness to put them to rest!! • the way you deal with them provides your firm with the best experience available • 28. This stuff requires deliberate and skillful managing that is on-going and pervasive. • Definition of an ethical firm:An enterprise that has earned the respect and trust of its employees, customers, suppliers, investors and others by striking an acceptable balance between its economic interests and the interests of all parties affected when making decisions and taking actions

Learning From the Experience of Ethical Firms • Avoiding Ethical Problems • The ethical firm is one where employees are motivated as a matter of course to behave ethically in their work. • Many ethical problems are avoided because companies become skilled in taking into account the interests of all parties affected by each business decision or action. • Aphorism: “An ounce of prevention is worth a pound of cure”. This applies as much to moral as to physical well-being. • Resolving Ethical Problems • Human weakness, the inherently perplexing nature of some ethical, situations, and the emergence of unanticipated ethical issues are some of the reasons why ethical breakdowns and confrontations arise in even the most high-minded corporate settings. • Recognizing and acknowledging the moral difficulties and an ability for responding appropriately. • Without the moderating effect of a well-established moral culture, the number and nature of troublesome ethical problems can escalate beyond management’s capacity to solve them.

Managing the Business Ethics Process • Developing Ethical Sensitivity • Senior managers must be aware of the common difficulties that can impede ethical leadership. • Senior managers must develop a sensitivity to the specific moral issues that affect or threaten their firms. • Without this sensitivity, senior managers can unwillingly cause or allow improper conduct to take place. • Strong Competitive Strategy and Operating Management • The second prerequisite action in the business ethics process is for senior management to ensure that the business is well managed in all other respects. • Poor operating performance invites cutting close to the line of acceptable behavior - and even crossing it - to avoid the consequences of failure

Under pressure from the board of directors or threats of takeover, even senior managers with the best of intentions can fall prey to the lures and tyranny of the bottom line. • Strong and effective management makes it easier to behave ethically when the organization can achieve its financial goals through upright business practices.

A Business Ethics Program • The third element in the framework for managing corporate ethics is promoting ethical behavior throughout the firm. • Basic considerations of a sound business ethics program: • Development of policies and organizational agreements that promote organizational concerns for the interest of the different parties affected by the firm’s operations. • Provide safeguards against corrupting business pressures. • Examples of management efforts to nurture an organizations’ ethical values: • Inspirational talks • Offering ethical training • Setting good examples • Disciplining misconduct • Being responsive to employees who are concerned or confused about ethical issues.

Ethical People • Fourth (element) component of the business ethics process is to staff and surround an organization with ethical people. • Recruit people with strong moral values. • Help employees to connect their personal values to their work activities. • Place people skillful in providing moral leadership in positions where such leadership can have the greatest effect on others in the organization. • The major point concerning sound strategic and operating management is to highlight the important enabling role that excellent commercial and financial results play in fostering corporate ethical behavior and not specifically to instruct on business administration. • In managing business ethics - results are not always proportional to effort measured in terms of just making changes (input) but does relate positively to the quality and consistency of the efforts.

Starting with informed leadership • Only when management’s good intentions are also informed intentions is it in a position to create a corporate context that motivates and supports ethical behavior. • You can get off to a bad start, if you don’t: • Think through what management wants to achieve. • Develop the understanding and expertise needed to bring about changes in the corporation’s commitment to higher ethical standards. • Management must create conditions favorable for gaining widespread commitment.

HOTLINES • 1. Nothing is off the record • Okay, I’ll just tell you then, I can’t take it anymore! • 2. They are at risk • Bluffed by their boss • I just talked to Art Hayes and he said you were giving them information!! There is no practical way to stop this!! They must be ready. • 3. Advise them to make sure of their sources • Are they being used by others who are afraid to step forward—perhaps because they know they do not really have anything!! • Turn them into detectives for you!! • Alexandria

ARE COMPLIANCE STANDARDS ADEQUATE? • Are they watered down? • Lowest common denominator? • Does compliance really mean anything? • T.

PERFORMANCE EVALUATIONS • Fairness • Objectivity • Probationary • Remedial help • A refuge?

TYPICAL reactions of the ACCUSED (actually, the reactions of their attorneys) • Our old friend, the loophole. What exactly is a material business relationship? • They fully complied with the law • They intend to defend the case aggressively • The case is unprecedented • We believe the case addresses industry-wide issues that the commission should address by rule • In no way have we breached fiduciary duties or defrauded any of the shareholders of the mutual funds • My clients have been given assurances that regulatory lawyers for the fund had approved the practice • The SEC by this enforcement action is really trying to create new rules that had never really been promulgated before

Beardstown Ladies ‘Fess Up To Big Goof • WSJ 3/18/98 • The price of grandmotherly advice may be going down soon • The group of grandmotherly investors had been the darlings of the media. • They said yesterday that an audit by Price-Waterhouse shows that their 10 year average rate of return was 9.1% and not the 23.4% touted on the cover of their best-selling book!! (The Dow Jones Industrial Average was up an average of 12.1% in the same period) • “They are terribly sorry for the error and any confusion it may have caused.” (Larry Vaughn, the fictional mayor of Amity in Jaws in announcing that the beaches were reopened after a great white shark had been caught, “I’m pleased to announce that the beaches are reopened. A large predator was caught which supposedly injured some bathers.”)

Betty Sinnock, the long time treasurer, said the mistake resulted from an error made when she tried to figure out the return for the period from 1984 to 1993. She thought she was getting a return figure for the 10 year period. Instead the remarkable 23.4% return applies only to the two year period 1991 and 1992. (Carefully worded, huh?) • “I don’t want to say (hmmm) it’s a computer error because I had to be the one who put it in.” said Ms. Sinnock, who is 66 years old.

Dangerous Myths and Realities • Myth: Ethical problems can be remedied without much time or effort. • Reality: Impossible! Must commit time, money, and information to solve the problem • Myth: What a company needs is a well-communicated code of ethics. • Reality: If the code is not supported by the culture, the employees will view it as a sham. • Myth: Top managers are needed to champion an ethical position. • Reality: Every manager and employee must accept responsibility to make integrity real. • Myth: All one needs is a good set of ethical principles. • Reality: Both principles and processes are needed. Responsibility integrates both processes and principles. • Myth: There is only one right way to solve an ethical dilemma. • Reality: Options are essential in order to incorporate all stakeholders and nurture healthy communications.

Myth: There is only one right way to solve an ethical dilemma. • Reality: Options are essential in order to incorporate all stakeholders and nurture healthy communications. • Myth: Experts can tell us how to handle ethical problems • Reality: Relying on Experts keeps people imprisoned. Empowerment is essential to moral leadership. • Myth: If one had clear rules, one would not have any problems. • Reality: If the existing rules do not apply, people get frustrated and stuck. Empowering people with the ability to think for themselves is essential.

Lessons Learned from an Integrity Audit • Having employees with integrity in an organization is necessary, but not sufficient. • Mutual trust and openness are absolutely necessary • The best way to solve ethical problems is my involving others • Responsibility is the key organizing concept and principle • Ethical principles exist and are shared by all • Planning for integrity has a high value • The decision-making process needs to take into account the perspectives of the stakeholders • A clear sense of mission and stewardship is shared throughout the organization • Living models need to show the way • What’s in it for me?

DEONTOLOGICAL AND UTILITARIAN CONSTRUCTS FOR RESOLVING ETHICAL ISSUES (Anticipatory Ethics)