Introduction
Ethic is defined as a system of moral values or set of principles (standards) of right conduct. All societies, including institutions and professions, have their ethics. Besides, individuals set rules that govern their own behaviour. In every society, dishonourable behaviour is unaccepted. Whether you are the one behaving dishonourably, or the one facilitating the behaviour, all are culprits. When defined as principles of right conduct, it means that ethics are rules that are not set for us by others; we set them ourselves; with an exception of the professional ethics that are preset. Therefore, there is no universal agreement on what constitutes an ethical behaviour. If an individual sets his/her ethical bar low enough, then, some of the unethical behaviours may be ethical to him/her. However, the ethical bar is preset in business organizations and bending below the bar is unethical. This paper focuses on how ethics is applied in business organizations, especially in the financial activities. Specifically, it looks at the ethics in reporting of financial data; ethics in selecting suppliers, materials, and costing of processes; and the ethics in setting product prices.
Ethics are important to business organizations. In any organization, ethics and integrity are focal to the value the organization brings to its stakeholders. The American Institute of Certified Public Accountants (AICPA) has developed the professional code of conduct that highlights how individuals should discharge their accounting duties in the most professional way. Most organizations worldwide have based their accounting codes of ethics on the precepts of the AICPA code (John Wiley & Sons, 2006). The codes are described hereunder.
In accounting and reporting of financial data, sensitive professional and moral judgments should be embraced at all times in all activities (AICPA, 2011, p.1677). Public interest is paramount, thus organizations must act in a manner that serves the public interest, honours the public trust, and demonstrates commitment to professionalism (AICPA, 2011, p.1679). Every organization must accept its responsibility to the public, which consists of the customers, investors, government, employees, suppliers, and the financial community at large.
In maintaining and broadening public confidence, professional responsibilities must be discharged with the highest sense of integrity (AICPA, 2011, p.1681). Integrity requires honesty and candidness. Service and public trust should never be substituted or subordinated with personal gain. Deceit or subordination of principles should never be tolerated. Integrity is looked at in terms of what is right and just. Every individual’s activities, actions, and decisions should be guided by integrity even in the absence of specific rules, standards, or guidance. When presented with conflicting opinions, integrity should prevail in decision making. It also requires that individuals adhere to the principles of objectivity and independence. When discharging the professional responsibilities, objectivity should be embraced and there should never be a conflict of interest (AICPA, 2011, p.1683).
The technical standards of reporting financial data should be observed at all costs. Individuals should strive to improve their competence and the quality of service, and discharge their professional responsibilities with utmost competence and diligence, to the best of their ability (AICPA, 2011, p.1685). There should always be the concern for the public and for those whose interests are served. Competence is derived from educational experience and the commitment to professional improvements through learning. Financial reports should be prepared in accordance with the GAAP standards. This should embrace clear thinking and rational analysis.
While it is the duty of the organization’s management to ensure that the financial statements and the supporting disclosure documents are prepared, the company’s accountants should ensure that these documents are complete, accurate, provide reliable information about the company, and adhere to the reporting standards of GAAP. This is very critical because willingness of investors to invest in the company is dictated by these documents and statements. Investors normally rely on the company’s reports and the auditor’s opinion that the financial reports reflect the actual financial position of the company, its cash flow, the results of operation, and the overall performance (John Wiley & Sons, 2006). Any slight lack of integrity leads to misrepresentation which leads to misinformation and deceit.
As an example to illustrate the ethics in reporting of financial data, consider a company with several current notes receivable at the end of the financial year. While the collection is certain, it’s likely to be delayed past one year. Due to this, the financial manager decides to re-classify the notes as non-current. He however realizes that this re-classification will significantly reduce the company’s current ratio, which has negative effects and may hinder the company from securing a major loan. This case presents a situation of ethical dilemma; whether the financial manager believes in the ethics, or puts the interests of the company above the ethics.
As an ethical accountant who upholds the principles of integrity and adheres to the standards of reporting, the current notes receivable must be re-classified into non-current notes receivable. This is because; the standard definition of current asset is “an item that is either cash or cash equivalent, or can be converted into cash within one year” (Accounting Dictionary, 2012). Based on this definition, the current notes that cannot be collected within one year cease to be current notes, but instead, are re-classified as non-current notes. If not re-classified, the company’s current ratio will remain high and the company will be able to secure the loan. The company benefits from this arrangement, but the lending agency is misled about the financial position of the company. Failure to re-classify the notes means that the financial office has discharged his professional responsibility without observing the principles of integrity; without observing the technical standards of reporting; and without providing reliable information that reflects the actual financial position of the company.
Ethics in selecting suppliers, materials, and costing of processes
Just as with reporting of financial data, integrity should be upheld when selecting suppliers, materials, and when costing. Traditionally, the selection of suppliers and materials was based on the “value for money” (UNEP, 2008). However, ethical considerations require the integration of the environmental and social impacts, with an aim of reducing the adverse impacts on human health and the environment at large. Before selecting suppliers, it is important to perform factory audits of the suppliers and pre-qualifications check to ensure that they meet the ethical requirements (UNEP, 2008).
In most organizations, selection of suppliers is done through a tendering process. It must be conducted in a manner that is fair and ethical. The process should comply with the principles of accountability and transparency by being open, clear, and defensible. It should embrace fairness by providing equal opportunity for all the suppliers during the tendering process. Principle of impartiality requires that all the suppliers (tenderers) are treated the same way without any bias. Principle of objectivity requires that, subjective judgment and opinion not based on objective evidence should be minimised at all costs when making the decisions (Tendering Manual, p.2). Principles of repeatability and reproducibility should be considered when selecting the suppliers. Repeatability requires that when the same tender is re-evaluated against the same criteria by the same team, then, the evaluation team should arrive at same decisions. On the other hand, reproducibility requires that when the same tender is evaluated against the same criteria by a different team, then, same decisions should be arrived at. Reasonableness requires that the decisions should be based on the information that is reasonably knowable by the evaluators, and should be supported by logical and rational argument. Finally, embracing thoroughness means that the decisions should be based on competent and comprehensive analysis of all the relevant information (Tendering Manual, p.2).
Selection of materials (products) is based on several factors including the price with whole-of-life costs, the quality, and fitness for purpose, experience, delivery, reliability, innovation, timeliness, servicing, and the value adding components such as meeting the environmental, social, and economic objectives. Product quality is normally linked to the environmental impacts. A high quality product has a longer life. This results in lower replacement rates. An eco-efficient product consumes less energy over its life-time and is cheaper to dispose. All these qualities, besides the purchase price, must be considered when selecting a product.
When selecting the products, ethics require that one selects the product that: secures the best value for money, quality, price, availability, and functionality; supports the precautionary approach to environmental concerns; is cleaner and safer; reduces pollution; and supports human rights.
Ethics in setting product prices
The price of a company’s products and services is an essential marketing strategy. When prices are high, the company gets more revenue per unit sold, but tends to scare away customers. On the other hand, lower prices results in less revenue per unit sold, but tend to attract more customers. The company must therefore choose appropriately its pricing strategy. Balancing between attracting customers and getting more revenue present the companies with no choice but to set realistic prices. While pricing directly influences the company’s revenues, it presents ethical concerns as well.
When setting the price of a product, all the costs relating to the product throughout its life must be considered. Fair pricing should be embraced to ensure that the company meets the labour costs, the materials costs, and the overhead costs, and make reasonable margin of profit. The ethical dilemma is, “how reasonable is a reasonable margin of profit?” Many companies, especially the monopolies, have sometimes set prices that are unrealistically higher, giving them unrealistic profits. As the industries become more and more competitive, only monopolies can afford the luxury of setting high prices. However, such monopolies rarely exist. It is unethical and illegal to charge unfairly high prices. This is considered as extortion.
Penetration pricing is an entry strategy used by companies. It involves setting of low prices on new products with an aim of increasing the market share. Its role is to attract more customers by driving them away from the competitor products with low initial prices on the new products. With time, the company increases the prices, hoping that the customers will continue to use the products because they are already used to it. This pricing strategy can sometimes raise ethical concerns. When the prices are set too low that the competitors are forced out of the market, the strategy becomes predatory and illegal. Predatory strategy is used with an aim of driving the competitors out of the market and then raising the prices higher than the realistic market levels. When the predatory pricing strategy is unchecked, a monopoly can result. With only one company controlling the entire market, market forces no longer determine the price; the company can raise the price as it wishes and this is highly unethical.
Other unethical issues in business include deceiving the customers with exaggerated adverts; misleading the customers that they are getting a bargain and the prices have been reduced, when otherwise; bribery, either through gifts or other benefits to win favours; disregarding the health and welfare of employees, customers, and the environment; among others. The list of unethical issues is endless.
Conclusion
Ethics are necessary in business activities. The set principles of conducting business are not enough on their own. In order for companies to be fully ethical and embrace high standards of professionalism and service delivery, individuals must set their ethical bar high enough. Highest sense of integrity and moral judgments should be embraced by all.
Accounting Dictionary (2012). Current Asset. Retrieved November 17, 2012 from http://www.accountingtools.com/definition-current-asset
AICPA (2011). Code of Professional Conduct and Bylaws. AICPA Professional Standards, volume 2. Retrieved November 17, 2012 from http://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/2011June1CodeOfProfessionalConduct.pdf
John Wiley & Sons. (2006). Ethics in Accounting. Retrieved November 17, 2012 from http://higheredbcs.wiley.com/legacy/college/kieso/0470374942/gate/Ethics_in_Accounting/ethics_in_accounting.html
Tendering Manual, Chapter 7. PWM-0633 Issue: Edition 2. Retrieved November 17, 2012 from http://www.google.co.ke/url?sa=t&rct=j&q=ethics+in+tender+evaluation&source=web&cd=1&cad=rja&ved=0CB8QFjAA&url=http%3A%2F%2Fwww.nswprocurement.com.au%2Fpsc%2FTendering-Manual%2FTM-2-00-Ch7.aspx&ei=O6enUODZBoXAhAfUzICABw&usg=AFQjCNFx7-tAzeYhvX9hQBZR6ZBSEoHMtA
UNEP (2008). Sustainable Procurement: Buying for a better world. Sustainable Procurement Manual (Resource Book), May 2008.
