GOVERNANCE Ethics

Governance- comprises all of the processes • It moral principles that govern a person's
of governing - whether undertaken by the government of behaviour or the conducting of an activity
a state, by a market or by a network - over a social system
• ‘’It is about assessing what is right and wrong’’
(family, tribe, formal or informal organization, a territory
or across territories) and whether through the laws, norms, • Right things vs wrong doings
power or language of an organized society.
Risk management
Forms of Government
Risk management is the process of identifying, assessing
• Anarchy Kleptocracy and controlling threats to an organization's capital and
earnings.
• Aristocracy Meritocracy
• Bureaucracy Monarchy
• Capitalism Obligarchy
• Colonialism Plutocracy
• Communism Republicanism
• Democracy Socialism
• Federalism Theocracy
• Feudalism Tribalism
Threats, or risks, could stem from a wide variety of
• Marxism Liberalism
sources, including financial uncertainty, legal liabilities,
strategic management errors, accidents and natural
disasters.
Common Types of Risk
• Financial Risk
• Market Risk
• Liquidity Risk
• Operational Risk

Internal Control
Internal control, as defined by accounting and auditing, is
Good Governance a process for assuring of an organization's objectives in
It is an approach to govern, that is committed to creating operational effectiveness and efficiency, reliable financial
a system founded in justice and peace that protects reporting, and compliance with laws, regulations and
individual's human rights and civil liberties. policies.

Governance is a social responsibility

Social responsibility is an ethical theory, in which
individuals are accountable for fulfilling their civic duty;
the actions of an individual must benefit the whole of
society.
Internal control is an interlocking set of activities that Bylaws can set the number of board members, the
are layered onto the normal operating procedures of an manner in which the board is elected.
organization, with the intent of safeguarding assets, • While there is no set number of members for a
minimizing errors, and ensuring that operations are board, most range from 3 to 31 members.
conducted in an approved manner. • Some analysts believe the ideal size is seven.

Internal Control interrelated components The board of directors should be a representation of both
management and shareholder interests and include both
• Control (Operating) Environment internal and external members.
• Risk Assessment Directors' Remuneration
• Control Activities
Directors' remuneration is the process by which directors
• Information and communication of a company are compensated, either through fees,
salary, or the use of the company's property, with approval
• Monitoring from the shareholders and board of directors.

DIFFERENT APPROACHES TO GOVERNANCE

CORPORATE GOVERNANCE, Rule based Approach and Principle Based-Approach
RESPONSIBILITIES AND ACCOUNTABILITIES
“A rules-based approach to regulation prescribe in detail
Scope of Governance or gives a set of rules, how to behave whereas a principle-
based approach to regulation outcomes and principles are
A group of people that governs a community or unit. It set set and the controls, measures, procedures on how to
sand administers public policy and exercises executive, achieve that outcome is left for each organisation to
political and sovereign power through customs, determine.”
institutions, and laws within a state.
In accounting, a principles-based on approach is the most
Agency Relationship and Theories popular accounting method globally because it is usually
Agency theory is a principle that is used to explain and better to adjust accounting principles to a company's
resolve issues in the relationship between business transactions, rather than adjusting a company's operations
to accounting rules.
principals and their agents. Most commonly, that
relationship is the one between shareholders, as
Relationship between Shareholders/ Owners and
principals, and company executives, as agents. Other Stakeholders
Areas of Dispute in Agency Theory
Agency theory addresses disputes that arise primarily in
two key areas:
• A difference in goals
• A difference in risk aversion.
BOARD OF DIRECTORS AND DIRECTORS
REMUNERATION

A board of directors (BOD) is an elected group of

individuals that represent shareholders. The board is a
governing body that typically meets at regular intervals to
set policies for corporate management and oversight. Parties Involved in Corporate Governance and their
Every public company must have a board of directors. Broad Role and Responsibilities
Some private and nonprofit organizations also have a
board of directors. 1. Shareholders
Provide effective oversight through election of board
GENERAL BOARD STRUCRURE members, approval of major initiatives such as buying or
• The structure and powers of a board are selling stock, annual reports on management
determined by an organization’s bylaws. compensation, from the board.
 3. Non-Executive or Independent Directors
2. Board of Directors - The same as the role of board of directors.
The major representative of stockholders to ensure that
the organization is run according to the organization’s 4. Management
charter and that there is proper accountability. - Operations and accountability. Manage the
organization effectively; provide accurate and timely
Specific activities include among others: reports to shareholders and other stakeholders.
1. Overall Operations 5. Audit Committees of the Board Directors
• Establishing the organization’s vision, mission, - provide oversight of the internal and external audit
values and ethical standards function and the process of preparing the financial
• Delegating an appropriate level of authority to statements as well as public reports on internal control.
management 6. Regulators
• Assuming responsibility for the business a. Board of Accountancy
relationship with CEO including his/her - set of accounting and auditing standards dictating
appointment, succession, performance underlying financial reporting and auditing concepts; set
remuneration and dismissal. the expectation of audit quality and accounting quality.
• Recommending auditors and new directors to b. Securities and Exchange Commission
shareholders. - Ensure the accuracy, timeliness, and fairness of public
• Overseeing aspects of the employment of the reporting of financial and other information for public
management team including management companies.
remuneration, performance and succession 7. External Auditors
planning. - perform audits of company financial statements
to ensure that the statements are free of material
• Crisis management
misstatements.
• Appointment of the CFO and corporate secretary.
8. Internal Auditors
2. Performance
- perform audits of companies for comiance with
• Ensuring the organization’s long term company policies and laws, audits to evaluate efficiency
viability and enhancing financial position. of operations, and periodic evaluation and tests of control.
• Formulating and overseeing Implementation
of corporate strategy.
• Approving the plan, budget and corporate ETHICAL DECISION MAKING FRAMEWORK
policies.
• Agreeing key performance indicators (KPIs) Ethics examines the rational justification for our moral
• Monitoring/assessing assessment, judgments; it studies what is morally right or wrong, just
performance of the organization, the board or unjust.
itself, management and major projects.
• Overseeing the risk management framework Ethical decision-making is the process by which people
and monitoring business risks. consider different ethical rules, principles, and guidelines
• Approving and monitoring the progress of that will affect the decision.
major capital expenditure, capital
management and acquisitions and Ethical Dilemmas in Workplace
divestitures.  Unethical Leadership
3. Compliance / Legal Conformance  Toxic Workplace Culture
• Understanding and protecting the  Discrimination and Harassment
organization’s financial position.  Unrealistic and Conflicting Goals
• Requiring and monitoring legal and  Questionable Use of Company Technology
regulatory compliance including compliance Business Ethics
with accounting standards, unfair trading  standard of moral conduct, behavior and
legislations, occupational health and safety judgement in business
and environmental standards.  Includes written and unwritten codes of
• Approving annual financial reports, annual principles and values, determined by an
reports and other public documents / sensitive organization's culture, that govern decisions
reports. and actions within that organization.
• Ensuring an effective system of internal  It is an area of corporate responsibility where
controls exists and is operating as expected. businesses are legally bound and socially
 obligated to conduct business in an ethical problem; the model is set in a way that it gives the
manner. leader “ethical filters” to make decisions.
Identify-Consider-Act- Reflect Framework The letter in PLUS each stand for a filter that leaders can
use for decision-making:
A framework used for analyzing and evaluating ethical
scenarios. The framework advances a decision making P – Policies and Procedures:
structure for situations that are often outside the clear
confines of “right or wrong”. Is the decision in line with the policies laid out by the
company?
Purposes of Business Ethics
L – Legal:
Main Purpose
Will this violate any legal parameters or regulations?
 The main purpose of business ethics is to help
business and would-be business to determine U – Universal:
what business practices are right and what are How does this relate to the values and principles
wrong. established for the organization to operate? Is it in tune
Special purpose with core values and the company culture?

 To make businessmen realize that they cannot S – Self:

employ double standards to the actions of other Does it meet my standards of fairness and justice?
people and to their own actions.
 To show businessmen that common practices PLUS presumes effective communication with all
which they have thought to be right because other employees so there is a common understanding of:
doing it wrong.
 To serve as a standard or ideal upon which  the organization's policies and procedures as they
business conduct should be based. apply to the situation.
 the applicable laws and regulations.
SCOPE AND IMPACT OF BUSINESS ETHICS  the agreed upon set of "universal" values in this
case Empathy, Patience, Integrity, Courage
 Economic Impact
(EPIC)
 Social Impact
 the individual's sense of right, fair and good
 Environmental Impact
springing from their personal values set.
 Impact on Business Managers
Identify
Ethical principles, duties to others, important facts and
conflicts or conflict of interest.
Consider
Situational Influences, alternative actions and additional
guidance.
Act
Make a decision or elevate the issue to a higher authority.
The Character-Based Decision- Making Model
Reflect
The character-based decision-making model was
What did you learn? The lessons will help the business to
developed by researchers at the Josephson Institute of
reach ethical decisions more quickly in the future.
Ethics. It provides a framework that can be used to decide
PLUS Ethical Decision Model whether a decision is morally and ethically sound.

 is one of the most used and widely cited ethical The Golden Rule – “Help when you can and avoid harm
models. when you can.”
 The purpose is to create a clear and cohesive
Ethical principles are morally superior to non- ethical
approach to implementing a solution to an ethical
principles and should be used as a guide for all decisions.
ACCOUNTING & INTERNATIONAL ETHICS ● Insider Trading
Accounting Ethics ● Manipulation of Financial Markets
Accounting Accounting Ethics
- is a service activity. Its function is to provide - it is primarily a field of applied ethics and is part
quantitative data primary financial in nature, about of business ethics and human ethics, the study of moral
economic entities that is intended in to be useful in values and judgement as they apply accountancy. It is an
making economic decision, in making reasoned choices example of professional ethics.
among alternative courses of action.
- Luca Pacioli
Accounting principle guide:
GAAP - Generally Accepted Accounting Principle

IFRS - International Financial Reporting Standards

IESBA - International Ethics Standards Board for

Accountants

Accounting concerned primarily with: IAS - International Accounting Standards

● Methods of recording Accounting Principles (GAAP, 2019)

● Keeping financial records ● Historical Cost Principle

● Performing internal Audits ● Revenue Recognition Principle

● Reporting and Analyzing Financial Information ● Matching Principle

to the management
● Full Disclosure Principle
● Advising taxation matters
● Cost Benefit Principle
Roles of Accountant
● Conservatism Principle
● Traditional external audit function
● Consistency Principle
● Tax
● Objectivity Principle
● Corporate finance advice
● Accrual Principle
● Finance, accounting and treasury functions
● Economic Entity Principle
● Analysis of financial information and provide
Accounting Concepts
best decision for the top management
● Accrual basis
Frauds can be found in 5 ways:
● Completeness
1. Fictitious revenue – Revenue not actually earned
● True and fair view or faithful representation
2. Fraudulent timing differences
● Materiality
3. Concealed liabilities and expenses
● Consistency
4. Fraudulent disclosure or omission
● Prudence
5. Fraudulent asset valuation
● Going concern basis
Other Issues in Accounting:
● Substance over form
● Earning management
● Periodicity Concept
● Creative Accounting
Accounting Ethical Issues
 ● Reporting False Income ● Physical Security
● Falsifying documents ● Speech association
● Allowing or taking questionable deduction ● Political Participation
● Illegally evading Income Taxes ● Education
● Misleading Financial Analysis ● Subsistence
● Engaging in Frauds
International Ethics
 It is an area of international relations theory
which concerns extent and scope
of ethical obligations between states in an era of
globalization.
 international Ethics, ethics are intended to be
universal.
International consists of
 National Laws that pertain to the foreign persons,
entities and other nations. Human Rights and Justice
 Inter-governmental treaties and agreements
- Some ethical issues arises not from the action of
 Ruling by international courts the individuals of firm but instead from the policy of the
 Action of international bodies like United government.
Nations, ASEAN and more.
Factors considered in International Ethics.
Cultural Relativism
- is the idea that a person's beliefs, values, and
practices should be understood based on that person's own
culture, rather than be judged against the criteria of
another. Appropriate behaviour in a country is determined
by its law and custom.
- In operating internationally, a firm maintains the
standard of its home country and judges others by those
standards.
The idea is that nation should:
 know the significance of cultural variation
 avoid cultural stereotypes
 know the importance of dynamic rather than the
static view of culture
 recognize the heterogeneity within given
communities
Universal Rights
● Freedom of Physical Movement
● Ownership of Property
● Freedom from torture
● Free trial
● Non-Discriminatory Treatment
 Internal Stakeholders
RESPONSIBILITY TOWARDS
OWNERS/SHAREHOLDERS
 Proper use of capital
 To manage business effectively
 To provide accurate and timely information
 Ensure growth and appreciation of owner’s
capital
International Arbitral tribunal  Provide regular and fair return on owners capital
An arbitral tribunal (or arbitration tribunal) is a panel of RESPONSIBILITY TOWARDS EMPLOYEES
one or more adjudicators which is convened and sits to
resolve a dispute by of arbitration.  Fair compensation for service provided
 Timely and regular payments
The tribunal may consist of a:
 Provision of proper working and welfare
Sole arbitrator, or there may be two or conditions
more arbitrators, which might include either  Job security
a chairman or an umpire.  Provision of security benefits and better living
conditions
 Training and development opportunities
CORPORATE SOCIAL RESPONSIBILITY  To recognize and honor individual worker’s right
 Fair and unbiased treatment to all
It is the business practice of joining environmental and
social policies with a business economic goals and RESPONSIBILITY TOWARDS MANAGEMENT
operations.
 Management decisions have impact
THEORIES OF CSR  Shareholder’s expects higher returns
 Management has a fine balance
Stakeholders Theory
 Is a view of capitalism that stresses the
External Stakeholders
interconnected relationships between a business
and its customers, suppliers, employees, RESPONSIBILITIES TOWARDS SUPPLIERS
investors, communities and others who have a
stake in the organization.  Giving regular orders
 The theory argues that a firm should create value  Dealing with suppliers on fair terms and
for all stakeholders, not just shareholders. conditions
 Availing reasonable terms of credit
In 1984, R. Edward Freeman originally detailed the  Timely payment of dues
Stakeholder Theory of organizational management and  Helping suppliers in improving or upgrading the
business ethics that addresses morals and values in quality
managing an organization.
RESPONSIBILITIES TOWARDS
INVESTORS/CREDITORS
 To provide fair returns on capital invested
 To supply complete and accurate information
 To ensure that the value of investment doesn’t fall
in the long term
 To raise public image of the company
 To improve prestige of the company
RESPONSIBILITIES TOWARDS
INVESTORS/CREDITORS
 To undertake R&D activities for diversification •
To build up financial stability and ensure safety
of investment
  To ensure timely payment of interests and  Maintaining Legitimacy. Work has to be done to
principal remain relevant to establish high society
 To not participate in unethical practices and bring acceptance.
disrepute to the company  Repairing legitimacy: Work has to be done to
make up for mistakes. Society doesn't like you
RESPONSIBILITIES TOWARDS COMPETITORS quite as much anymore. This might explain why
 Not to claim exceptionally high commissions to mining companies disclose lot of information
agents and distributors about their environmental efforts.
 Not to offer too high discounts to the consumers  Loss/abandonment: The firm works out that it
 Not to defame competitors directly or indirectly isn't worth the cost of trying to be the "nice guy"
of society. Think Big Tobacco.
RESPONSIBILITIES TOWARDS SOCIETY
 Business morality
CRITIQUES ON LEGITIMACY THEORY
 Development of backward areas • Efficient use of
resources  Not the same as accountability
 Financial assistance  The difficulty of recognizing when legitimacy
 Protection of environment concerns are in play, and empirically measuring
its affect on accounting decision-making.
 The motivation for seeking legitimacy may
RESPONSIBILITIES TOWARDS GOVERNMENT involve more complex strategies from
management than the rather simplistic view of
 Payment of taxes Legitimacy Theory.
 Obeying rules and regulations  May be showing us nothing more than regular
 Giving suggestions risk management activities by management
 Financial help during emergency
POLITICAL ECONOMIC THEORY
CRITIQUES ON STAKEHOLDERS THEORY
Political economy is a social science that studies
 Lacks specificity (Key,S. 1999) production, trade, and their relationship with the law and
 offers no decision-making criteria that would the government. It is the study of how economic theories
adequately guide corporate governance. (Brayden affect different socio-economic systems such as socialism
2006) and communism, along with the creation and
 vacuous and offers an unrealistic view of how implementation of public policy.
organizations operate (Treppo, 2006)
 involves a set of negotiations between the parties,
as they try to define who deserves more or less of
the firm’s resources. (Coff, 1999)
 They postulate that stakeholders’ influence over
firm decision-making is a function of the firm’s
dependence on them for critical resources.
(Frooman, 2000)
LEGITIMACY THEORY Modern economist’s theories are split into three
ideologies:
 This theory assets that the organization (business
or otherwise) are continually trying to influence Liberalism - stems from the concept of labor and
society’s perceptions about them. exchange and the use of land, labor, and capital to produce
 They want the society to see them as “legitimate”. durable goods.
 Firms can expect to run operations that generally
meet society’s expectation. Marxism - inequality is bad, and wealth is generated from
labor and exchange.
The lifecycle of legitimacy
Economic nationalism - belief that the state possesses all
 Gaining legitimacy: Society bestows legitimacy the power and that individuals should work to make use
upon a new organization. of the economic benefits.
CSR under Political Economy
 Proper use of political power to deal economic
resource

 Analysis of Economic situation

Focus on how government use political power to deal
economic resources in countries.
Domestic
 Depends on form of government that is
practiced.
 Example: monarchy, autocracy, republic and
democracy
International
 Depends on pact between countries at
international level.
 Example: ASEAN, EU, AFTA, NAFTA