Finance, ESG and Professional Codes of Conduct & Ethics - L Flashcards
(22 cards)
Definitions - 1
What is Corporate Social Responsibility (CSR)?
What does Integrity mean in business?
What is Business Conduct?
What does Transparency mean in business practices?
What is Compliance in the business environment?
What is Sustainability in business practices?
What does Responsibility mean in a business context?
What is Corporate Social Responsibility (CSR)?
- It is a firm’s commitment to acting ethically and contributing positively to society and the environment.
What does Integrity mean in business?
- It refers to upholding moral principles and honesty in business practices.
What is Business Conduct?
- It is the manner in which a company behaves, typically guided by ethical standards.
Definitions - 2
What is Corporate Governance?
What does Accountability mean in a business context?
What is Fairness in business dealings?
What is Corporate Governance?
- It is the framework of rules, practices, and processes by which a company is directed and controlled, ensuring ethical management.
What does Accountability mean in a business context?
- It means holding individuals or the company responsible for their actions, especially in terms of ethical practices.
What is Fairness in business dealings?
- It is about ensuring all parties are treated equally and justly.
Definitions - 3
What does Transparency mean in business practices?
What is Compliance in the business environment?
What is Sustainability in business practices?
What does Responsibility mean in a business context?
What does Transparency mean in business practices?
- It involves operating in an open manner where decisions, actions, and results are clear and understandable.
What is Compliance in the business environment?
- It means adhering to laws, regulations, and ethical standards.
What is Sustainability in business practices?
- It refers to respecting social, economic, and environmental considerations for long-term impact.
What does Responsibility mean in a business context?
- It is about acting in a way that is socially, ethically, and legally accountable for the company’s decisions.
Common ethical rationalizations
What is the theory?
Examples (5)
less important
During childhood we instinctively learned to rationalize our misconduct,
As we became adults, however, we soon realized that greater reasons were needed to persuade others to accept, or at least to indulge as plausible, our excuses for misbehavior
These include:
- “Everyone does it”
- “The other guy’s are worse”
- “If it’s not Illegal, it can’t be wrong”
- “No harm, no foul”
- “They made me do it!”
Other’s identified by various academics are: “It’s for your own good”, “we’ve always done it this way”, “Who am I to judge”, “It’s not my job”, “It’s too important; it’s necessary”, “I’m only human” and “Ethics is a luxury I can’t afford right now”
“Navigating Ethical Challenges in Business Education”
What are ethical dilemmas? (2)
What is the lack of consensus in business?
What is the challenge in transferring theory to practice? (2)
What might business schools focus on regarding ethical behavior? (2)
What are ethical dilemmas?
- Ethical dilemmas involve situations where business school discussions revolve around choosing between two morally acceptable options, neither of which is clearly wrong.
- This can lead students to question whether ethical behavior is even possible in business.
What is the lack of consensus in business?
- There is no agreement on the purpose of business—whether it should aim for societal betterment or prioritize shareholder profits.
What is the challenge in transferring theory to practice?
- Understanding what the right thing to do is in theory doesn’t always translate into action in real-world situations.
- This is particularly true when it’s difficult to speak up or blow the whistle in organizations.
What might business schools focus on regarding ethical behavior?
- Business schools might emphasize the consequences of unethical behavior rather than teaching ethical thoughtfulness.
- Role-playing exercises are one example, highlighting the severe consequences of unethical actions, especially for those lacking ethical training at home.
What does Customer Perceived Ethicality (CPE) give us
Customer Perceived Ethicality (CPE) gives us insights into the domains which customers consider when judging whether they consider a business is ethical or not.
What types of breakdowns in ethical decision making do we see? (5)
Ill-Conceived Goals
- We set goals and incentives to promote a desired behavior, but they may unintentionally encourage a negative one.
Motivated Blindness
- We overlook unethical behavior by others when it serves our interest to remain ignorant of it.
Indirect Blindness
- We tend to hold individuals less accountable for unethical actions when those actions are carried out through a third party.
The Slippery Slope
- We are less likely to notice unethical behavior if it develops gradually over time.
Overvaluing Outcomes
- We sometimes excuse unethical behavior if the end result appears positive or desirable.
Corporate Governance: Basic Concepts
What is Corporate Governance?
What does these include?
At a very high level…?
What are Corporate Governance structures?
Some of these structures and processes will: (3)
- Corporate Governance is effectively the structures and systems which are in place within an organisation to direct and control.
- These include the rules, practices and processes of the organization.
- At a very high level these processes determine which actions the company takes, the aims and objectives it will pursue etc.
- Corporate Governance structures are mechanisms which are in place to distribute the decision-making process and monitor and control that decision making.
Some of these structures and processes will:
- be from within the company (Board of directors, management structures and practices, etc.)
- be appointed by the company (i.e. Auditors)
- surround and permeate the company (i.e. regulators and having to comply with a regulatory framework)
Corporate Governance and Ethical Decision Making
Corporate Governance processes should involve a _____ _________ __ _____________ ______________.
The OECD 2015 Guidelines on Corporate Governance Principles are clear. (p.53) Some key statements are: (4)
Principles help ________ _________ ___________ and ___________ the ______, _____________ and _________________ ___________ for corporate governance, with a view to support ______________ _____________, _______________ ________ and ___________ _____________.
Corporate Governance processes should involve a high degree of ethical standards.
The OECD 2015 Guidelines on Corporate Governance Principles are clear. (p.53) Some key statements are:
- “The board should apply high ethical standards.”
- “The board has a key role in setting the ethical tone of a company, not only by its own actions, but also in appointing and overseeing key executives and consequently the management in general.”
- “High ethical standards are in the long-term interests of the company as a means to make it credible and trustworthy, not only in day-to-day operations but also with respect to longer term commitments.”
- “…jurisdictions are increasingly demanding that boards oversee the finance and tax planning strategies management is allowed to conduct, thus discouraging practices”
Principles help policy makers evaluate and improve the legal, regulatory and institutional framework for corporate governance, with a view to support economic efficiency, sustainable growth and financial stability.
Corporate Governance and ESG Investing:
What is ESG investing?
Why is a commitment to ethical investing important for an investor?
What are some other names for ESG investing?
How do investors check their investment against their filter?
What do proponents of ESG investing argue? (3)
What is ESG investing?
- Environmental, Social, and Governance (ESG) investing involves applying a set of standards to screen or filter investment opportunities. These standards can be externally agreed upon, internally agreed within a company, or intrinsic to the investor.
Why is a commitment to ethical investing important for an investor?
- Ethical investing becomes a core part of an investor’s identity and deeply influences their investment decisions.
What are some other names for ESG investing?
- ESG investing is also known as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI).
How do investors check their investment against their filter?
- Investors evaluate a company’s range of behaviors and policies. These are often defined by the company’s leadership through their processes of Corporate Governance.
What do proponents of ESG investing argue?
- Over time, as more investors focus on Environmental, Social, and Governance (ESG) issues:
- Companies excelling in ESG practices will find it easier and cheaper to access capital.
- These companies will gain a financial advantage over competitors who are weaker in ESG practices.
ESG Investments
What is the company perspective on ESG investments? (2)
What is the investor’s perspective on ESG investments? (2)
What is the company perspective on ESG investments?
- To improve the world by directing capital towards companies that behave responsibly (green companies) and away from those that do not (brown companies).
- This shift affects companies’ cost of capital, making it cheaper for green companies to fund projects and more expensive for brown companies.
What is the investor’s perspective on ESG investments?
- Investing in green companies might result in lower expected returns because higher stock and bond prices (due to increased demand) lower the future returns on these investments.
- There are doubts about claims that ESG investing leads to higher financial returns, with its primary benefit being societal rather than financial.
Ethics and Finance Professionals - 1
What kind of codified set of principles or framework do most finance professions have? (2)
Do these codes of conduct overlap? (3)
Is the field of auditing by accountants well-regulated and does it adhere to high ethical standards?
What kind of codified set of principles or framework do most finance professions have?
- Most finance professions have a codified set of principles or framework designed to help professionals recognize and address ethical dilemmas.
- These frameworks also establish professional standards for behavior.
Do these codes of conduct overlap?
- Sometimes, codes of conduct overlap. For example, an accountant conducting an audit may have to consider multiple ethical codes:
- The ICAEW (Institute of Chartered Accountants in England and Wales) Code of Ethics or ACCA (Association of Chartered Certified Accountants).
- Financial Reporting Council (FRC) Ethical Standards.
- IFAC (International Federation of Accountants) Code of Ethics.
Is the field of auditing by accountants well-regulated and does it adhere to high ethical standards?
- Given the depth and overlap of ethical standards, it would be understandable to assume that auditing by accountants is well-regulated and upholds high ethical standards.
Ethics and Finance Professionals - 2
What standards might exist for professionals in banking?
What codified principles exist for professional financial advisors in the UK?
How did tougher standards for financial advisors emerge in the UK?
What challenge do professional standards bodies and regulators face?
What standards might exist for professionals in banking?
- Both the banking regulatory body and the professional body of the banker may have their own distinct sets of standards.
What codified principles exist for professional financial advisors in the UK?
- The Financial Conduct Authority has codified “Statements of Principle” for professional financial advisors in the UK.
How did tougher standards for financial advisors emerge in the UK?
- Modern standards were introduced in 2013 through the Retail Distribution Review, following a series of product mis-selling scandals such as PPI and pensions.
What challenge do professional standards bodies and regulators face?
- They often play “catch-up” by responding to the last major scandal, though some strive to be forward-thinking.
Ethics and Finance Professionals: Conceptual Frameworks
What is the preference in the UK regarding frameworks of professional ethical conduct?
What are the reasons advocates usually give for preferring a principle-based framework? (5)
What is the preference in the UK regarding frameworks of professional ethical conduct?
- There is a preference to create principle-based frameworks of professional ethical conduct over rule-based “tick-box” behavioral approaches.
What are the reasons advocates usually give for preferring a principle-based framework?
- Requires active consideration of issues
- Establishes basic principles
- Can be applied to differing circumstances
- Responsive to rapid change
- Requires judgment rather than literal interpretations encouraged by a pure rules approach
Ethics and Finance Professionals: Fundamental Principles
Fundamental Principles (ICAEW): (5)
Fundamental Principles to avoid Ethical Threats such as: (5)
Fundamental Principles (ICAEW):
Confidentiality:
- Safeguarding sensitive information from unauthorized access or disclosure.
Objectivity:
- Making decisions based on impartial and unbiased judgment.
Professional competence and due care:
- Maintaining skills and diligence to deliver high-quality services.
Professional behavior:
- Acting in a way that reflects well on the profession and adheres to its standards.
Integrity:
- Upholding honesty and strong moral principles in professional activities.
Fundamental Principles to avoid Ethical Threats such as:
Familiarity:
- Preventing conflicts of interest from close relationships with key personnel in audited companies.
Advocacy:
- Avoiding situations where representing a client might impair impartiality.
Self-interest:
- Avoiding scenarios where personal gain might compromise professional judgment.
Self-review:
- Ensuring professionals do not assess their own work to maintain objectivity.
Intimidation:
- Steering clear of coercive situations that could compromise ethical behavior.
Definitions
Immediate Profit Recognition:
Overestimating Asset Values:
Misappropriation of assets:
Immediate Profit Recognition:
- Gains from these inflated values are recognised immediately, boosting reported profits even if the actual cash hasn’t been realised.
Overestimating Asset Values:
- Companies might use optimistic assumptions to value their assets at higher prices than they could realistically sell for.
Misappropriation of assets:
- unauthorized or illegal use of an organization’s resources or assets for personal gain. This type of fraud typically involves employees or management exploiting their positions to steal or misuse company assets, such as cash, inventory, or equipment
The main theme areas concerning fraud which financial professionals should be concentrating on are: (3/2,2,0)
Incentives and Pressures (Enticements)
- Very difficult as an external to the organisation to fully understand the internal pressures.
- Auditors sometimes struggle to understand “ground level” pressures as they can be insulated from these by mainly talking to management levels or executive levels of the organisation.
Opportunity (linked to this is Complexity)
- High turnover of auditors, lax corporate monitoring, intricate and complex transactions which are opaque and difficult to understand. Managers with powers to override internal controls.
- Acting on insider knowledge (an opportunity) another classic example which regulators have found very hard to prosecute.
Attitudes and Rationalisations (can linked to corporate culture)
How Theranos got away with fraud for so long (9)
- Lack of External Audits: As a private company, Theranos was not required to undergo external audits, which allowed it to present unaudited financial statements to investors
- High-Profile Endorsements: The company leveraged connections with influential figures and high-profile investors, creating an appearance of legitimacy and reducing scrutiny
- Innovative Technology Claims: Theranos claimed to have revolutionary technology that could perform numerous tests with a single drop of blood, which was difficult for outsiders to verify.
- Ambitious Growth Targets: There was immense pressure to meet ambitious growth targets and maintain the company’s high valuation
- Competitive Industry: The healthcare and biotech industries are highly competitive, creating pressure to innovate and stay ahead of competitors
- Investor Expectations: Investors had high expectations for returns, which added pressure to deliver positive results and maintain confidence
- “Fake it Until You Make It” Culture: The Silicon Valley culture of “fake it until you make it” may have led executives to believe that temporary deception was acceptable until they could achieve their technological promises
- Belief in the Vision: Executives might have rationalized their actions by believing in the ultimate success of their vision and the positive impact it would have on healthcare
- Minimizing Harm: They may have convinced themselves that their actions were not causing significant harm and that any issues would be resolved in the future.
Bribery
What is the occurrence of bribery at, or by, a company?
What must banks and bankers be careful of, even if they have no direct involvement in bribery itself?
What is an important part of a bank’s compliance work with anti-money laundering legislation?
What must financial professionals themselves be wary of?
What forms can bribery?
What else may bribery include that is difficult to quantify?
What is the occurrence of bribery at, or by, a company?
- The occurrence of bribery at, or by, a company can be very difficult for financial professionals to detect but should be vigilantly monitored for.
What must banks and bankers be careful of, even if they have no direct involvement in bribery itself?
- Banks and bankers must be careful of being seen to facilitate bribery through customers’ bank accounts.
What is an important part of a bank’s compliance work with anti-money laundering legislation?
- Looking for suspicious transactions, which could include bribes and money laundering.
What must financial professionals themselves be wary of?
- Financial professionals must be cautious about being placed in situations where they are offered a bribe.
What forms can bribery take?
- Bribery may include gifts, preferential treatment, or even “expressions of gratitude.”
What else may bribery include that is difficult to quantify?
- It may also include less tangible forms, such as “promises of future profitable work.”
Bribery: Official and Commercial
What is bribery at its heart?
What is Official Bribery?
What is Commercial Bribery? (3)
Why does the perception and recognition of bribery matter to business?
What is the impact of the Bribery Act 2010 in the UK? (2)
What is bribery at its heart?
- Bribery at its heart is a violation and betrayal by the person who accepts the bribe. It represents a breach of the duty owed to their employer.
What is Official Bribery?
- Official Bribery is considered a serious crime globally and is punishable with severe penalties. For example, in China, some officials convicted of bribery have received the death sentence.
What is Commercial Bribery?
- Commercial Bribery is not as clearly defined across countries:
- In some countries (e.g., Great Britain, Canada), it is treated as a serious crime.
- In others (e.g., Saudi Arabia, Mexico), it is considered a breach of contract, subject to employer discipline or civil action.
Why does the perception and recognition of bribery matter to business?
- The way bribery is perceived and recognized has significant implications for businesses and their operations.
What is the impact of the Bribery Act 2010 in the UK?
- The Bribery Act 2010 is considered one of the toughest legal regimes globally.
- It bans facilitation payments (small amounts paid to officials for expedited services like visas or customs checks), which some businesses argue puts them at a commercial disadvantage compared to countries where such payments are legal.
Bribery: Detection and Prevention
What does the UK Bribery Act include?
However…?
There is therefore usually a strong emphasis in UK companies on: (6)
Extra
The UK Bribery Act includes the offense of “failing to prevent bribery”
However a full legal defence can be made if you put appropriate procedures in place to try and prevent bribery.
There is therefore usually a strong emphasis in UK companies on:
- Bribery training
- Strong internal controls (Internal Audit)
- Top Level commitment through codes of conduct and fostering an appropriate business culture
- Risk assessment
- Due Diligence
- Good communication of policies and procedures
Fines for non-compliance can be large
- A qualified accountant is working as a corporate treasurer in a large company, how do the ICAEW Principles of Professional Ethics apply to their work? (8 Marks)
1.
As a treasurer working for a company, it is crucial to adhere to the ICAEW Principles of Professional Ethics. These principles guide professional accountants in their work and help ensure that they act with integrity and maintain the public’s trust. The following three principles are particularly relevant to the work of a treasurer:
- Integrity: Treasurers have a fiduciary duty to act in the best interests of their clients. This means that they must be honest and transparent in all their dealings and avoid conflicts of interest. Treasurers should act with integrity, be straightforward and truthful in their communications, and ensure that all financial transactions are recorded accurately and transparently. (Up to 3 Marks)
- Objectivity: Treasurers must maintain objectivity in their work and avoid any bias or partiality. They should provide unbiased advice to their clients and ensure that their recommendations are based on sound financial principles rather than personal preferences or conflicts of interest. (Up to 3 Marks)
- Professional Competence and Due Care: Treasurers must possess the necessary knowledge, skills, and expertise to carry out their work competently. They must stay up to date with developments in their field and ensure that their advice and recommendations are based on sound financial principles. Treasurers should also exercise due care in their work, taking all necessary precautions to ensure that their clients’ financial interests are protected. (Up to 3 Marks)
In conclusion, treasurers have a critical role to play in managing their clients’ financial affairs. Adhering to the ICAEW Principles of Professional Ethics is essential to ensure that treasurers act with integrity, maintain objectivity, and provide competent and careful advice to their clients.
