Chapter 3: Organizational Ethics and Corporate Governance
Four fits of Ethical Dissonance
#. Organization ethics-Indiviudal Ethics 1. High-High 2. Low-low 3. High-Low 4. Low-High
COSO Internal Control Framework
1. Control Environment 2. Risk Assessment 3. Control Activities 4. Monitoring 5. Information and Communication
Seven Signs of Ethical Collapse
1. Pressure to maintain numbers 2. Fear and silence 3. Loyalty to the boss, bigger than life CEO 4. Weak board of directors 5. Conflicts of interest overlooked or unaddressed 6. Innovation like no other company 7. Goodness in some areas atones for evil in others
Chapter 3 Case Studies
3-2: Rite Aid Inventory Surplus Fraud 3-4: Franklin Industries' Whistleblowing 3-6: Full Disclosure 3-9: Loyalty to the Boss, Company and/or the Profession
The role of a leader is to...
Determine organizational ethical climate and define norms
Ethical and Legal Responsibilities of Offices and Directors
Duty of Care Duty of Loyalty Duty of Good Faith Business Judgement Rule
Framework for Understanding Ethical decision making in business
Ethical Issue Intensity Individual factors Organizational Factors Opportunity Business ethics intentions, behavior and Evaluations
Potential Agency Problems
Executive Compensation, tied to firms performance Backdating stock options and improper disclosures Clawbacks allow a recovery of comp from CEO and CFO "Say on Pay" provisions gives shareholders a vote regarding the compensation of CEO and CFO's
Ethical Culture
Explicit statement of values, beliefs and customs from top management
Ethical Dissonance Model
Fit between individual and organization, based on the ethical fit at points in the contractual relationship in each ethical fit scenario
Organizational Ethics
Generally accepted principles and standards that guide behavior in organization contexts
Organizational Ethical climate
Moral atmosphere and level of ethics practiced within a company Determined by leaders Focuses on issues of right and wrong
Thomas Jones with respect to Moral intensity posited that...
Moral issues of high intensity are more pronounced than those of low intensity
Business ethics intentions, behavior, and evaluations
Organizational ethical culture is shaped by effective leadership
Organizational Factors
Organizations values have a greater influence than a persons own values
Corporate Governance Structures and Relationships
Shaped by internal and external controls Internal: help manage, direct, and monitor corporate activities, to create sustainable stakeholder value ie. independent board, audit committee, management, internal controls and the internal audit function External: monitor the company activities, affairs, and performance to ensure that interest of insiders are aligned with the interest of outsiders ie. financial markets, state and federal statutes, court decisions, shareholder proposals
What does financial statement fraud occur?
Situational pressure Perceived opportunity Rationalization Cultures is created at the top of a company willing to do whatever it takes
Duty of Care
act in good faith
Duty of Loyalty
act in the best interest of corporation
Weakness of internal control
can provide only reasonable, not absolute, assurance to management and that BOD
Opportunity and what limits it
conditions that allow ethical and unethical behavior, and are limited by "controls"
Business Judgement Rule
expected to exercise due care and to use their best judgement igniting corporate managment
Ethical Issue Intensity
importance of issue to the stakeholders based on values beliefs and norms
Occupational fraud v. Financial statement fraud
occupational fraud is generally committed by employees
Duty of Good Faith
requires an honesty of purpose that leads to caring for the well-being of the constituents of the fiduciary
Unique aspect of occupational fraud is....
the misuse of company assets
COSO framework emphasizes...
the role of BOD, management, internal auditors, and personnel
Individual factors
values of individuals