Professional values and ethics

09 Personal ethics

This chapter begins the detailed coverage of ethics, which is a core topic not
only in this paper but generally in ACCA’s professional exams. ACCA has
introduced an online ethics module as part of its training and this section of the
syllabus develops ethical themes covered in the online module. Remember
when working through this chapter that
personal ethics are emphasised by
ACCA as well as business ethics.
We start by examining certain important ethical theories and in doing so
highlight a couple of key issues; whether there are objective, universal
standards and to what extent ethics should be concerned with the
consequences of actions. We then look at what may influence approaches to
ethics. In particular Kohlberg’s framework of ethical maturity is very important.
In the last two sections of the chapter we concentrate on how ethical problems
should be approached in practice and also the way to tackle exam questions
that cover ethical scenarios. We focus on the AAA and Tucker models that are
highlighted in the study guide.

Study guide

    Intellectual level
E1 Ethical theories  
(a) Explain and distinguish between the ethical theories of relativism and absolutism. 2
(b) Explain, in an accounting and governance context, Kohlberg’s stages of human moral development. 3
(c) Describe and distinguish between deontological and teleological/consequentialist approaches to ethics. 2
(d) Apply commonly used ethical decision-making models in accounting and professional contexts: American Accounting Association model; Tucker’s 5 question model. 2
E2 Different approaches to ethics and corporate social responsibility  
(c) Describe and analyse the variables determining the cultural context of ethics and corporate social responsibility (CSR). 2
E6 Ethical characteristics of professionalism  
(a) Explain and analyse the content and nature of ethical decision-making using content from Kohlberg’s framework as appropriate. 2
(b) Explain and analyse issues related to the application of ethical behaviour in a professional context. 2

Exam guide

The Pilot Paper asked for a straightforward description of certain approaches to ethics. Other questions may be more complex, requiring consideration of influences on a person’s or organisation’s ethical position. A typical question might ask you to interpret people’s actions or attitudes in light of the ethical theories or suggest how one of the theories might affect behaviour.

You may also be asked to apply the ethical theories and models to a business decision. The examiner has emphasised the importance of ‘the ethics parts of the study guide and the ethical reasoning capabilities in particular. Well-prepared candidates should not only be aware of the ethical theories but also be able to use them and apply them. It will not be sufficient to merely define. An ability to adapt and apply is also essential.’ Questions may require you to use a particular ethical framework, or choose an appropriate ethical framework to construct an ethical case.

                                  1 Ethical theories                                         6/15

FAST FORWARD             A key debate in ethical theory is whether ethics can be determined by objective, universal principles. How important the consequences of actions should be in determining an ethical position is also a significant issue.

1.1 An introduction to ethics

In this chapter you will encounter various philosophical, academic terms. We have to use this terminology, as the examiner will use it in questions. However, provided that you focus on certain basic issues, you will be able to negotiate this chapter successfully.

1.1.1 Do ethics change over time and place? 

One viewpoint is that ethics do vary between time and place. Slavery for example is now regarded as wrong, whereas in Roman times slavery was acceptable. The view that ethics vary between different ages and different communities is known as ethical relativism and is discussed in Section 1.3.

The opposing view is that ethics are unchanging over time and place. Some courses of action are always right, others are always wrong. A simple example would be saying that it is always wrong to steal. The view that there are certain unchanging ethical rules is known as ethical absolutism and is discussed in Section 1.4.

1.1.2 Should you consider the consequences of your actions when making ethical decisions?

One view is that society is best served by everyone following certain ethical rules, and obeying them no matter what the results are. The argument is that people will undermine society if they disobey the ethical rules, even if they do so with the intention of avoiding adverse consequences. This viewpoint, known as deontological ethics, was developed by Kant.

The opposing viewpoint is that you cannot divorce an action from its consequences, and when taking ethical decisions you must take account of what the consequences will be. This viewpoint is known as teleological ethics. If you take this viewpoint, it implies that you have to define the best possible consequences. The different variations of the teleological viewpoint try to do this.

1.1.3 What thought processes do people use when making ethical decisions? 

What the theories are aiming to do is to complete the following sentence.

‘You should act ethically because … ‘

In Section 2 we shall look at the work of Kohlberg who supplied various examples of thought processes, depending on the degree of ethical development of the individual.

  • People who are less ethically developed may think: ‘You should act ethically because you’ll be punished if you don’t.’
  • People who have more advanced ethical development may think: ‘You should act ethically because your country’s laws say you should.’
  • People at the highest level of ethical development may think: ‘You should act ethically because it’s always right to do so, no matter what the consequences and costs are to you personally.’



Briefly explain the main ethical issues that are involved in the following situations.

  • Dealing with a repressive authoritarian government abroad
  • An aggressive advertising campaign
  • Employee redundancies
  • Payments or gifts to officials who have the power to help or hinder the payees’ operations
  • Dealing with unpleasantly authoritarian governments can be supported on the grounds that it contributes to economic growth and prosperity and all the benefits they bring to society in both countries concerned. This is a consequentialist argument. It can also be opposed on consequentialist grounds as contributing to the continuation of the regime, and on deontological grounds as fundamentally repugnant.
  • Honesty in advertising is an important problem. Many products are promoted exclusively on image. Deliberately creating the impression that purchasing a particular product will enhance the happiness, success and sex appeal of the buyer can be attacked as dishonest. It can be defended on the grounds that the supplier is actually selling a fantasy or dream rather than a physical article.
  • Dealings with employees are coloured by the opposing views of corporate responsibility and individual rights. The idea of a job as property to be defended has now disappeared from labour relations in many countries, but corporate decisions that lead to redundancies are still deplored. This is because of the obvious impact of sudden unemployment on aspirations and living standards, even when the employment market is buoyant. Nevertheless, businesses have to consider the cost of employing labour as well as its productive capacity.
  • The main problems with payments or gifts to officials are making distinction between those that should never be made, and those that can be made in certain cultural circumstances.
    • Extortion. Foreign officials have been known to threaten companies with the complete closure of their local operations unless suitable payments are made.
    • Bribery. This is payment for services to which a company is not legally entitled. There are some fine distinctions to be drawn. For example, some managers regard political contributions as bribery.
    • Grease money. Multinational companies are sometimes unable to obtain services to which they are legally entitled because of deliberate stalling by local officials. Cash payments to the right people may then be enough to oil the machinery of bureaucracy.
    • Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of civilised negotiation, even in circumstances where to Western eyes they might appear ethically dubious. Managers operating in such a culture may feel at liberty to adopt the local customs.


1.2 Role of ethical theory

Ethics is concerned with right and wrong and how conduct should be judged to be good or bad. It is about how we should live our lives and, in particular, how we should behave towards other people. It is therefore relevant to all forms of human activity.

Business life is a fruitful source of ethical dilemmas because its whole purpose is material gain, the making of profit. Success in business requires a constant, avid search for potential advantage over others and businesspeople are under pressure to do whatever yields such advantage.

It is important to understand that, if ethics is applicable to corporate behaviour at all, it must therefore be a fundamental aspect of mission, since everything the organisation does flows from that. Managers responsible for strategic decision-making cannot avoid responsibility for their organisation’s ethical standing. They should consciously apply ethical rules to all their decisions in order to filter out potentially undesirable developments. The question is, however, which ethical rules should be obeyed; those that always apply or those that hold only in certain circumstances?

Ethical assumptions underpin all business activity as well as guiding behaviour. The continued existence of capitalism makes certain assumptions about the ‘good life’ and the desirability of private gain, for example. As we shall see in Chapter 10, accountancy is allegedly not a value-neutral profession. It establishes and follows rules for the protection of shareholder wealth and the reporting of the performance of capital investment. Accordingly accounting, especially in the private sector, can be seen as a servant of capital, making the implicit assumptions about morality that capitalism does.

                                  1.3 Ethical relativism and non-cognitivism        6/08, 12/10

Relativism is the view that a wide variety of acceptable ethical beliefs and practices exist. The ethics that are most appropriate in a given situation will depend on the conditions at that time.
Key term

The relativist approach suggests that all moral statements are essentially subjective and arise from the culture, belief or emotion of the speaker.

Non-cognitivism recognises the differences that exist between the rules of behaviour prevailing in different cultures. The view that right and wrong are culturally determined is called ethical relativism or moral relativism. Ethical rules will differ in different periods within the same society, and will differ between different societies. Acceptance of ethical relativism implies that a society should not impose moral imperatives strictly, since it accepts that different ethical and belief systems are acceptable.

This is clearly a matter of significance in the context of international business. Managers encountering cultural norms of behaviour that differ significantly from their own may be puzzled to know what rules to follow.



What can be said about the morality of a society that allows abortion within certain time limits in certain circumstances, or which allows immigration if immigrants fulfil certain requirements (will benefit the local economy)?



The suggested treatment of these issues suggests that the society is a non-cognitivist, ethically relative society. Banning abortion would be one sign of an ethically absolute society.


1.3.1 Strengths of relativism
  • Relativism highlights how ethical positions depend on what people observe and biases due to the limits of their perception.
  • Relativism also highlights differences in cultural beliefs. For example, all cultures may say that it is wrong to kill innocents, but different cultures may have different beliefs about who innocents actually are.
  • The philosopher Bernard Crick argued that differing absolutist beliefs result in moral conflict between people. (Relativist) ethics should act to resolve such conflicts.
  • In the global economy, where companies conduct businesses in many different countries and cultures, adopting a relativist approach presumes more flexibility and therefore greater success.
1.3.2 Criticisms of relativism
  • Put simply, strong relativism is based on a fundamental contradiction. The statement that ‘All statements are relative’ is itself an absolute, non-relative statement. However, it is possible to argue that some universal truths (certain laws of physics) exist, but deny other supposedly objective truths.
  • A common criticism of relativism, particularly by religious leaders, is that it leads to a philosophy of ‘anything goes’, denying the existence of morality and permitting activities that are harmful to others.
  • Alternatively some critics have argued for the existence of natural moral laws (discussed below). These are not necessarily religious laws. The atheist scientist Richard Dawkins has argued in favour of natural laws.
  • Ideas such as objectivity and final truth do have value – consider for example the ethical principle that we shall discuss later for accountants to be objective.
  • If it’s valid to say that everyone’s differing opinions are right, then it’s equally valid to say that everyone’s differing opinions are wrong.

                                  1.4 Ethical absolutism and cognitivism               6/08, 12/10

Absolutism is the view that there is an unchanging set of ethical principles that will apply in all situations, at all times and in all societies.
Key term

Absolutist approaches to ethics are built on the principle that objective, universally applicable moral truths exist and can be known. There is a set of moral rules that are always true. There are various methods of establishing these.

  • Religions are based on the concept of universally applicable principles.
  • Law can be a source of reference for establishing principles. However, ethics and law are not the same thing. Law must be free from ambiguity. Unlike law, though, ethics can quite reasonably be an arena for debate, about both the principles involved and their application in specific rules.
  • Natural law approaches to ethics are based on the idea that a set of objective or ‘natural’ moral rules exists and we can come to know what they are. In terms of business ethics, the natural law approach deals mostly with rights and duties. Where there is a right, there is also a duty to respect that right. For those concerned with business ethics there are undeniable implications for behaviour towards individuals. Unfortunately, the implications about duties can only be as clear as the rights themselves and there are wide areas in which disagreement about rights persists.
  • Deontological approaches (see below).

Many absolutists would accept that some ethical truths may differ between different cultures. However, they would also believe in certain basic truths that should be common to all cultures (for example ‘thou shall not kill’).

1.4.1 Strengths of absolutism
  • Fundamentally the statement that absolute truth does not exist is flawed. If it does not exist, then the statement that it does not exist cannot be true.
  • Absolutism lays down certain unambiguous rules that people are able to follow, knowing that their actions are right.
1.4.2 Criticisms of absolutism
  • Absolutist ethics takes no account of evolving norms within society and the development of ‘advances’ in morality; for example, development of the belief that slavery is wrong.
  • From what source should absolutist ethics be derived? Should it be religion, universal laws, human nature? Whatever source is used, it is then possibly subject to human interpretation with the result that different views may exist on the same issue and there will never be universal agreement.
  • What happens when two absolutist positions appear incompatible? For example, is it permissible to tell a lie in order to save an innocent life?
  • A theory can be true according to a relative framework as well as true according to an absolute framework. What differs is the nature of the framework and not the truth of the statement.
December 2010 Question 1 asked students to consider an ethical dilemma from both the absolutist and relativist perspectives.
Exam focus point

                                  1.5 Deontological ethics                                                      12/08

Deontology is concerned with the application of absolute, universal ethical principles in order to arrive at rules of conduct, the word deontology being derived from the Greek for ‘duty’.
Key term

Deontology lays down criteria by which actions may be judged in advance; the outcomes of the actions are not relevant. The definitive treatment of deontological ethics is found in the work of the 18th century German philosopher, Immanuel Kant.

Kant’s approach to ethics is based on the idea that facts themselves are neutral. They are what is. They do not give us any indication of what should be. If we make moral judgements about facts, the criteria by which we judge are separate from the facts themselves. Kant suggested that the criteria come from within ourselves and are based on a sense of what is right, an intuitive awareness of the nature of good.

Kant spoke of motivation to act in terms of ‘imperatives’.

A hypothetical imperative lays down a course of action to achieve a certain result. For instance, if I wish to watch a play in a theatre I must purchase a ticket.

A categorical imperative, however, defines a course of action in terms of acting in accordance with moral duty without reference to outcomes, desire or motive. For Kant, moral conduct is defined by categorical imperatives. We must act in certain ways because it is right to do so – right conduct is an end in itself.

Kant arrived at three formulations of the categorical imperative. These were published at different times, and do overlap. The term maxim means an expression of a general rule of conduct.

(a)           Principle of Consistency

‘So act that the maxim of your will could hold as a principle establishing universal law.’

This is close to the common sense maxim called the golden rule found in many religious teachings, for example the bible:

‘In everything do to others what you would have them do to you, for this sums up the Law and the Prophets.’ (Matthew 7:12)

The difference between Kant’s views and the golden rule is that under the golden rule, one could inflict harm on others if one was happy for the same harm to be inflicted on oneself. However, Kant would argue that certain actions were universally right or wrong irrespective of the personal, societal or cultural conditions.

Kant went on to suggest that this imperative meant that we have a duty not to act by maxims that result in logical contradictions. Theft of property for example implies that it is permissible to steal, but also implies the existence of property. However, if theft is allowed there can be no property, a logical contradiction. Kant also argued that we should act only by maxims that we believe should be universal maxims. Thus if we only helped others when there was advantage for ourselves, no one would ever give help to others.

(b)             Principle of Human Dignity

‘Do not treat people simply as means to an end but as an end in themselves.’

The point of this rule is that it distinguishes between people and objects. We use objects as means to achieve an end. A chair is for sitting on, for instance. People are different.

We regard people differently from the way we regard objects, since they have unique intellects, feelings, motivations, and so on of their own. Treating them as objects denies their rationality and therefore rational action.

Note, however, that this does not preclude us from using people as means to an end as long as we, at the same time, recognise their right to be treated as distinct beings. Clearly, organisations and even society itself could not function if we could not make use of other people’s services. (c)         Principle of Autonomy

‘So act as though you were through your maxims a law-making member of the kingdom of ends.’

Autonomous human beings are not subject to any particular interest and are therefore only subject to the laws which they make for themselves. However, they must regard those laws as binding on others, or they would not be universal and would not be laws at all.

1.5.1 Criticisms of Kant
  • Contradictions

Critics have pointed out a dualism in Kant’s views. He sees humans as part of nature whose actions can be explained in terms of natural causes. Yet Kant also argues that human beings are capable of self-determination with full freedom of action and in particular an ability to act in accordance with the principles of duty. Man is therefore capable in effect of rising above nature, which appears to conflict with the view that man is a natural animal.

  • Consequences

It is argued that you cannot take actions in a vacuum and must have regard for their consequences. The Swiss philosopher Benjamin Constant put forward the ‘enquiring murderer’ argument. If you agree with Kant and hold that Truth telling must be universal, then one must, if asked, tell a known murderer the location of his prey. Kant’s response was that lying to a murderer denied the murderer’s rationality, and hence denied the possibility of there being free rational action at all. In addition, Kant pointed out that we cannot always know what the consequences of our actions would be.

  • Self-reform

Kierkegaard argued that, whatever their expectations of others, people failed to apply Kant’s duties to themselves, either by not exercising laws morally or not punishing themselves if they morally transgressed.

                                   1.6 Teleological or consequentialist ethics: utilitarianism                                                                             12/08

There are two versions of consequentialist ethics:

  • Utilitarianism – what is best for the greatest number
  • Egoism – what is best for me

The teleological approach to ethics is to make moral judgements about courses of action by reference to their outcomes or consequences. Right or wrong becomes a question of benefit or harm rather than observance of universal principles.

Key term                Utilitarianism can be summed up in the ‘greatest good’ principle – ‘greatest happiness of the greatest number’.

This says that when deciding on a course of action we should choose the one that is likely to result in the greatest good for the greatest number of people. It therefore contrasts sharply with any absolute or universal notion of morality. The ‘right’ or ‘wrong’ can vary between situations and over time according to the greatest happiness of the greatest number.

Utilitarianism underlies the assumption that the operation of the free market produces the best possible consequences. Free markets, it is argued, create wealth, leading to higher tax revenue, and this can pay for greater social welfare expenditures.

Exam focus point The Pilot Paper asked for the consequentialist and deontological approaches to ethics to be contrasted.

1.6.1 Problems with utilitarianism

There is an immediate problem here, which is how we are to define what is good for people. Bentham, a philosopher who wrote on utilitarianism, considered that happiness was the measure of good and that actions should therefore be judged in terms of their potential for promoting happiness or relieving unhappiness. Others have suggested that longer lists of harmful and beneficial things should be applied.

The utilitarian approach may also be questioned for its potential effect on minorities. A situation in which a large majority achieved great happiness at the expense of creating misery among a small minority would satisfy the ‘greatest good’ principle. It could not, however, be regarded as ethically desirable.

However, utilitarianism can be a useful guide to conduct. It has been used to derive wide-ranging rules and can be applied to help us make judgements about individual, unique problems.

Absolutism and deontology come from a similar basis, and so do relativism and teleology. However, absolutism and relativism are assumptions, whereas deontology and teleology are ethical theories.

If a question asks about the deontology or teleology theories, this will involve more than just discussing the assumptions underpinning them.

Exam focus point



A connected problem lies in outcomes that may in fact be beneficial but are not recognised as such. The structural adjustment programmes provided by the International Monetary Fund (IMF) are a case in point. They are designed to align a country’s economic incentives so that, by improving trade and public finances, they meet an objective, such as debt repayment. The IMF might argue, therefore, that the pain and dislocation suffered are short-term difficulties for long-term wellbeing. Critics of IMF structural adjustment programmes might suggest the opposite; that they are designed to remove money from the very poorest. The rights of the poor are more important than those of bondholders and to insist on repayment is unethical.


Exam focus         December 2008 Question 4 required discussion of an ethical dilemma from deontological and teleological point             (consequentialist) ethical perspectives.

1.7 Teleological or consequentialist ethics: egoism

Key term                Egoism states that an act is ethically justified if decision-makers freely decide to pursue their own shortterm desires or long-term interests. The subject to all ethical decisions is the self.

Adam Smith argued that an egoistic pursuit of individual self-interest produced a desired outcome for society through free competition and perfect information operating in the marketplace. Producers of goods for example have to offer value for money, since competition means that customers will buy from competitors if they don’t. Egoism can also link in with enlightened self-interest, such as a business investing in good facilities for its workforce to keep them content and hence maintain their loyalty.

1.7.1 Criticisms of egoism

One criticism of pure egoism is that it makes short-term selfish desires equivalent to longer-term, more beneficial interests. A modified view would give most validity to exercising those short-term desires that were in long-term interests. A more serious criticism has been that the markets do not function perfectly, and that some participants can benefit themselves at the expense of others and also the wider environment – hence the debate on sustainability which we shall consider in Chapter 11. Most fundamentally egoism is argued to be the ethics of the thief as well as the short-termist.

1.8 Pluralism

Pluralism accepts that different views may exist on morality, but suggests a consensus may be able to be reached in certain situations. A pluralist viewpoint is helpful in business situations where a range of perspectives have to be understood in order to establish a course of action. It emphasises the importance of morality as a social phenomenon. Some rules and arrangements need to be established for us to live together and we therefore need a good understanding of the different moralities that we will encounter.

However, a consensus may not always be possible, and this is a key message of this section of the text. Irreconcilable ethical disputes tend to arise when absolutists argue with relativists, or if you have a deontological viewpoint opposed to a teleological viewpoint. For example during the recent debate in the UK about embryology, deontological arguments on the sanctity of life were opposed to teleological arguments about the scientific benefits of experimentation on embryos.

2 Influences on ethics


Ethical decision-making is influenced by individual and situational factors.

Individual factors include age and gender, beliefs, education and employment, how much control individuals believe they have over their own situation and their personal integrity.

Kohlberg’s framework relates to individuals’ degree of ethical maturity; the extent to which they can take their own ethical decisions.

Situational factors include the systems of reward, authority and bureaucracy, work roles, organisational factors, and the national and cultural contexts.

2.1 The cultural context of ethics and corporate social responsibility

                                                                                                                          12/14, 6/15

Models of ethical decision-making divide the cultural factors that influence decision-making into two categories.

  • Individual – the characteristics of the individual making the decision
  • Situational – the features of the context which determine whether the individual will make an ethical or unethical decision

The problem with identifying these factors is that it is difficult to break them down individually since many of them are interdependent. In addition, evidence on the importance of individual factors seems to come mainly from the US, whereas information on situational factors seems mainly to come from Europe. This arguably reflects an American focus on individual economic participants, whereas European attention is more focused on the design of economic institutions and how they function morally and promote moral behaviour in others.

2.2 Individual influences
2.2.1 Age and gender

Although some evidence suggests that the ways in which men and women respond to ethical dilemmas may differ, empirical studies do not clearly show whether men or women can be considered as more ethical. Similarly, although different age groups have been influenced by different experiences, again empirical evidence does not suggest that certain age groups are more moral than others.

2.2.2 National and cultural beliefs

By contrast, national and cultural beliefs seem to have a significant effect on ethical beliefs, shaping what individuals regard as acceptable business issues. Hofstede has indicated that significant differences lie in the following four areas.

  • Individualism/collectivism – the extent to which the culture emphasises the autonomous individual as opposed to group and community goals
  • Power distance – how much acceptance there is in the society of the unequal distribution of power, and the perceived gap between juniors and seniors in a society or social structure (eg children/parents, students/teachers, citizens/legislators)

Hickson and Pugh describe power distance as ‘how removed subordinates feel from superiors in a social meaning of the word distance. In a high power distance culture, inequality is accepted … in a low power distance culture inequalities and overt status symbols are minimised and subordinates expect to be consulted and to share decisions with approachable managers’.

  • Uncertainty avoidance – individuals’ preferences for certainties, rules and absolute truths
  • Masculinity/femininity – or the extent to which money and possessions are valued against people and relationships

These factors may influence how an individual tackles an ethical problem, alone (in an individualist culture) or in consultation (in a collectivist situation). Other influences might be on how individuals respond to ethically questionable directives from their superiors. In power distance cultures, where hierarchy is respected, commands are less likely to be questioned (I was only obeying orders). Globalisation may weaken the influence of national factors, although there is often a close connection between the local culture and a particular geographical region.

2.2.3 Education and employment

By contrast, globalisation might be expected to strengthen the influence of education and employment. There do appear to be some differences in ethical decision-making between those with different educational and professional experiences.

2.2.4 Psychological factors

Psychological factors are concerned with the ways in which people think and therefore decide what is the morally right or wrong course of action. Discussion has centred on cognitive moral development and locus of control.

2.2.5 Locus of control

The locus of control is how much influence individuals believe they have over the course of their own lives. Individuals with a high internal locus believe that they can shape their own lives significantly, whereas those with external locus believe that their lives will be shaped by circumstances or luck. This distinction suggests that those with an internal locus will take more responsibility for their actions and are more likely to consider the moral consequences of what they do. However, research does not clearly indicate whether this is true in practice. As we saw in Chapter 5, this may also link into attitudes towards risk and what can be done to deal with risk.

2.2.6 Personal integrity

Integrity can be defined as adhering to moral principles or values. Its ethical consequences are potentially very significant, for example in deciding whether to whistleblow on questionable practice at work despite pressure from colleagues or superiors or negative consequences of doing so. However, evidence of its importance is limited because strangely it has not been included in many ethical decision models.

Moral imagination

Moral imagination is the level of awareness individuals have about the variety of moral consequences of what they do and how creatively they reflect on ethical dilemmas. The consequences of having a wide moral imagination could be an ability to see beyond the conventional organisational responses to moral difficulties and formulate different solutions. Again there is little research on this subject, but differing levels of moral imagination would seem to be a plausible reason why individuals with the same work background view moral problems in different ways.

                                 2.3 Kohlberg’s cognitive moral development  12/07, 6/09, 6/11, 6/14

Kohlberg’s cognitive moral development theories relate to the thought processes people go through when making ethical decisions.

Kohlberg explains the ethical development of individuals in terms of development through three levels of moral development with two stages within each level. Although these levels are meant to relate to an individual’s experience, in fact all three levels can be related to ethical behaviour. They show the reasoning process of individuals. It is possible that individuals at different levels will make the same moral decisions, but they will do so as a result of different reasoning processes. Kohlberg emphasises how the decision is reached, not what is decided.

Level 1 Pre-conventional (rewards/punishment/self-interest)

The decisions individuals make on ethical matters will have nothing to do with the ethical issues involved, but instead will depend on the personal advantage or disadvantage to the individual.

Stage 1 Punishment-obedience orientation

Individuals will see ethical decisions in terms of the rewards and punishments that will result.

  • How will I be rewarded if I do this?
  • What punishment will I suffer if I do this?

Stage 2 Instrumental-relativist orientation

Individuals will see ethical decisions in the more complex terms of acting in their own best interests. They will see the decision in terms of the deals they can make and whether these deals are fair for them. For example, it can mean helping others when others appear overworked, but in return expecting others to help them when the situation is reversed.

Level 2 Conventional

Stage 3 Good boy-nice girl orientation

This stage can be defined as individuals learning to live up to what is expected of them by their immediate circle (friends, workmates or even close competitors). This can work both ways in a business context. An individual might feel pressurised into staying out for a long lunch because everybody else in his team does. On the other hand, individuals may feel they have to be at work by a certain time because everybody else is, even if it is earlier than their prescribed hours.

Stage 4 Law and order orientation

Individuals are seen as operating on a higher stage within this level if they operate in line with the rules laid down by society or what society believes to be socially or culturally acceptable. This implies looking at what society in general wants, rather than just the opinion of those around them. It certainly means complying with the law but it doesn’t just mean that. Directors may for example decide to offer better terms to overseas workers because of the activities of pressure groups campaigning against ‘sweatshop labour’. Many business managers appear to think with Level 2 reasoning, as do many accountants. Arguably Stage 4 reasoning underlies most behaviour by accountants, as they comply with financial reporting and corporate governance requirements.

Level 3 Post-conventional

The most advanced level relates to individual development towards making their own ethical decisions in terms of what they believe to be right, not just acquiescing in what others believe to be right.

Stage 5 Social contract orientation

On the lower stage what individuals believe to be right is in terms of the basic values of their society, including ideas of mutual self-interest and the welfare of others. This differs from Stage 4 in that individuals act according to their own interpretation of what the basic values are, rather than being influenced by the rules of society or the interpretations of others in society.

Stage 6 Universal ethical principle

On the higher stage, individuals base their decisions on wider universal ethical principles, such as justice, equity or rights, and Kant’s framework. It also means respecting the demands of individuals’ consciences. Business decisions made on these grounds could be disclosure on grounds of right to know that isn’t compelled by law, or stopping purchasing from suppliers who test products on animals, on the grounds that animals’ rights to be free from suffering should be respected. We must stress here that using Stage 6 reasoning may involve a personal cost, since it may mean failing to comply with existing social norms and regulations as they are seen as unethical.

2.3.1 Criticisms of Kohlberg

Kohlberg argued that the higher the stage, the more ethical a decision was. However, Kohlberg’s work has been criticised for:

  • Biased sample

Critics have claimed that Kohlberg’s sample is too narrowly founded on the typical abstract principles of American males such as fairness, impartiality, rights and maintenance of rules. Carol Gilligan, one of Kohlberg’s former students(!), argued that women tend to use an ethic of care with a focus on empathy, harmony and interdependent relationships.

  • Own values

Kohlberg has also been criticised for basing the framework on his own value judgements. Critics argue that the framework values rights and justice above other bases of morality, such as basing actions on social consequences or the need to achieve a peaceful settlement of conflict or problems.

  • Influences on acceptability

Kohlberg’s argument that the acceptability of a solution depends on the method of reasoning has been questioned. The stage of moral development reached here would also appear to be significant.

  • Method of reasoning

Critics have also questioned the assumption that moral action is primarily decided by formal reasoning. Social intuitionists argue that people make moral judgements in real life without necessarily considering concerns such as fairness, law, human rights and abstract values. The judgements they make to solve a problem in real life may be different to those if given the same problem as a theoretical problem.

  • Assuming individual development

This is perhaps the most serious criticism of Kohlberg, that individuals do not necessarily progress during their lives, and even if they do progress, it may only be in certain situations. They may use different methods of moral reasoning inside and outside the workplace.

Kohlberg’s framework is emphasised significantly in the syllabus, and you therefore will need to consider it when dealing with various ethical situations. For example, does the organisation’s ethical framework allow people to make up their own minds on ethics, or does it assume (or promote) a lower level of ethical awareness?

You may also need to identify the Kohlberg level that someone is at, given that they are behaving in a certain way; suggest the most appropriate level at which someone should operate; and produce arguments for and against operating at certain levels.

Exam focus point



Lowfloat Airlines has been under pressure from its institutional shareholders to cut costs and boost margins. Its Board issued an internal memo to all budget holders with a demand to ‘seek all possible cost reductions’. The memo is strongly worded and, among other things, encourages budget holders ‘to push back the boundaries, innovate, and to think the unthinkable’.

Traditionally a major area of cost had been aeroplane maintenance. Aircraft are constructed largely from aluminium, which is notoriously difficult to weld. In order to overcome this problem the manufacturers of aircraft resorted to the use of aluminium composite rivets to hold the super-structure together. However, due to the molecular properties of the aluminium used, and the extremes of temperature that planes are exposed to in-flight, these rivets fatigue very quickly. Failure to replace rivets has been attributed as the cause of many of the crashes suffered by Russian airlines in the past few years.

Many aviation authorities lay down strict rules on the replacement of aircraft rivets because the reliability of the aircraft is severely compromised if rivets remain on the aircraft beyond a set number of flying hours. The rivets are very expensive due to the price of the raw materials and the fact that they must be stored in freezers prior to fitting to maintain the integrity of the composite. As such, all rivets produced by aerospace manufacturers are colour-coded in line with an international agreement so that once a rivet is past its replacement date it can be easily identified and replaced during maintenance checks.

In order to cut costs senior managers in the Engineering department are recommending that maintenance staff paint over the heads of rivets that are approaching the end of their recommended life. It is the view of the maintenance managers that rules governing rivet use are too strict and that it is perfectly safe to extend their use by two to three years.

At the board meeting the following opinions were expressed.

  • We should find out whether and how our competitors are cutting maintenance.
  • We shouldn’t trade human lives off against shareholder value.
  • Passengers travel with us on the assumption that we’re providing a safe form of transport.
  • We should weigh up the penalties we might suffer if we’re discovered against the very high costs of our current maintenance schedule.
  • We have an obligation to meet the aircraft industries’ regulations.
  • We should find out the chances of being grounded if the aviation regulators discover what we’ve done.


Identify the levels and stages of moral development from Kohlberg’s framework that are demonstrated by the six contributions made at the meeting.




Pre-conventional Stage 1

(f)            The decision is seen solely in terms of how Lowfloat will be punished if its deception is discovered.

Stage 2

(d)       This shows a more sophisticated view of economic self-interest with the costs of different options being weighed up.


Stage 3

(a)       This argument is based on Lowfloat doing what its peers are doing. Peers can include competitors, so the director is arguing that Lowfloat should behave in a way that is normal for the industry.

Stage 4

(e)       This argument grounds ethical compliance as obeying aircraft industry regulations. It differs from Stage 3 in that it sees decisions in terms of best practice as defined by regulation; what Lowfloat and its competitors should be doing rather than what they are doing.  

Post-conventional Stage 5

(c)        This is based on the underlying ideas of how society operates and what is expected of business. Passengers, when paying Lowfloat, have the expectation that Lowfloat will be able to convey them safely. If they do not have that expectation of airlines, then the whole business model would be undermined.

Stage 6

(b)       This is based on the absolute ethical view that it is always wrong to give economic considerations priority over human safety. Lowfloat should spend whatever it takes to ensure that passengers are conveyed safely.


2.4 Situational influences

The reason for considering situational influences on moral decision-making is that individuals appear to have ‘multiple ethical selves’ – they make different decisions in different circumstances. These circumstances might include issue-related factors (the nature of the issue and how it is viewed in the organisation) and context-related factors (the expectations and demands that will be placed on people working in an organisation).

2.5 Issue-related factors
2.5.1 Moral intensity

Thomas Jones proposed a list of six criteria that decision-makers will use to decide how ethically significant an issue was, and therefore what they should do.

  • Magnitude of consequences – the harms or the benefits that will result
  • Social consequences – the degree of general agreement about the problem
  • Probability of effect – the probability of the harms or benefits actually happening
  • Temporal immediacy – the speed with which the consequences are likely to occur; if they are likely to take years, the moral intensity may be lower
  • Proximity – the feelings of nearness that the decision-maker has for those who will suffer the impacts of the ethical decision
  • Concentration of effect – whether some people will suffer greatly or many people will suffer lightly

Research suggests that moral intensity is significant but has to be seen in the context of how an issue is perceived in an organisation.

2.5.2 Moral framing

Moral framing sets the context for how issues are perceived in organisations. Language is very important. Using words such as fairness and honesty is likely to trigger moral thinking. However, evidence suggests that many managers are reluctant to frame issues in moral terms, seeing it as promoting disharmony, distorting decision-making and suggesting that they are not practical. Instead, issues are more likely to be discussed in terms of rational corporate self-interest.

2.6 Context-related factors
2.6.1 Systems of reward

Reward mechanisms have obvious potential consequences for ethical behaviour. This works both ways. Basing awards on sales values achieved may encourage questionable selling practices. Failing to reward ethical behaviour (or worse still, penalising whistleblowers or other staff who act ethically) will not encourage an ethical culture.

Sadly a majority of studies in this area seem to indicate that there is a significant link between the rewarding of unethical behaviour and its continuation.

2.6.2 Authority

There are various ways in which managers may encourage ethical behaviour, for example by direct instructions to subordinates and by setting subordinates targets that are so challenging that they can only be achieved through taking unethical shortcuts. Failing to act can be as bad as acting, for example failing to prevent bullying. Studies suggest that many employees perceive their managers as lacking ethical integrity.

2.6.3 Bureaucracy
Bureaucracy is a system characterised by detailed rules and procedures, impersonal hierarchical relations and a fixed division of tasks.

Key term

Bureaucracy underpins the authority and reward system, and may have a number of impacts on individual’s reactions to ethical decision-making.

  • Suppression of moral autonomy – individual ethical beliefs tend to be overridden by the rules and roles of the bureaucracy
  • Instrumental morality – seeing morality in terms of following procedures rather than focusing on the moral substance of the goals themselves
  • Distancing individuals from the consequences of what they do
  • Denial of moral status – that ultimately individuals are resources for carrying out the organisation’s will rather than autonomous moral beings
2.6.4 Work roles

Education and experience build up expectations of how people in particular roles will act. Strong evidence suggests that the expectations staff have about the roles that they adopt in work will override the individual ethics that may influence their decisions in other contexts.

2.6.5 Organisational field
An organisational field is a community of organisations with a common ‘meaning system’ and whose participants interact more frequently with one another than those outside the field.

Key term

Organisations within an organisation field tend to share a common business environment, such as a common system of training or regulation. This means that they tend to cohere round common norms and values.

Within an organisational field a recipe is a common set of assumptions about organisational purposes and how to manage organisations. If the recipe is followed, it means that organisations within the organisational field can provide consistent standards for consumers, for example. However, it can also mean that managers within the field cannot appreciate the lessons that could be learned from organisations outside the field, and therefore transition outside the field may be difficult.



An example would be a private sector manager joining a public service organisation and having to get used to different traditions and mechanisms; for example, having to build consensus into the decisionmaking process.


The result of being in an organisational field can be a desire to achieve legitimacy – meeting the expectations that those in the same organisational field have in terms of the assumptions, behaviour and strategies that will be pursued.

2.6.6 Organisational culture
Organisational culture is the ‘basic assumptions and beliefs that are shared by members of an

organisation, that operate unconsciously and define in a basic taken-for-granted fashion an organisation’s view of itself and its environment.’      (Handy)

Key term

Organisational culture relates to ways of acting, talking, thinking and evaluating. It can include shared:

  • Values that often have ‘official’ status being connected to the organisation’s mission statement but which can be vague (acting in the interests of the community)
  • Beliefs that are more specific than assumptions but represent aspects of an organisation that are talked about, for example using ‘ethical suppliers’
  • Behaviours, the ways in which people within the organisation and the organisation itself operate, including work routines and symbolic gestures
  • Taken for granted assumptions, which are at the core of the organisation’s culture which people find difficult to explain but are central to the organisation; the paradigm represents the common assumptions and collective experience that an organisation must have to function meaningfully

Organisational culture may be different to (may conflict with) the official rules of the bureaucracy. Unsurprisingly it has been identified as a key element in decisions of what is morally right or wrong, as employees become conditioned by it into particular attitudes to ethical decision-making.

In addition to the main organisational culture, there may also be distinct subcultures that are often dependent on the way the organisation is structured, for example function or division subcultures.

2.6.7 National and cultural context

In an organisational context, this is the nation in which the ethical decision is made rather than the nationality of the decision-maker. If someone spends a certain length of time working in another country, their views of ethical issues may be shaped by the norms of that other country, for example on sexual harassment. Globalisation may complicate the position on this.



In May 2009 revelations about the size and nature of MPs’ expense claims rocked politics in the UK. The controversy could be viewed from several ethical viewpoints. The controversy certainly illustrated most of Kohlberg’s stages of reasoning.

Pre-conventional Stage 2. The idea of deals in MPs’ own interests was illustrated by one argument used to defend the system. The argument was that a generous expenses system had been introduced to compensate MPs for the failure to grant them politically unpopular salary rises. Labour MP Harry Cohen stated that the former Conservative minister John Moore had told MPs ‘Go out boys and spend it’ when he introduced a big uprating of the allowance in the 1980s to head off a pay revolt by backbench Tories.

Conventional Stage 3. Some MPs and their supporters claimed that they were being unfairly singled out: ‘He has only done what everyone else has done, so I don’t blame him for that.’

Conventional Stage 4. The argument used by many MPs was that their claims were within the rules that Parliament had approved, and were granted by the UK Parliament’s Fees Office. This for example was the argument used by Labour politician John Prescott to justify expenditure on the fitting of mock Tudor beams to the front of his constituency home in Hull. ‘Every expense was within the rules of the House of Commons on claiming expenses at the time.’

Post-conventional Stage 5. An argument used by many critics was that, in a time of recession, MPs should not be using taxpayers’ money to fund large expense claims. ‘He has claimed the maximum amount and I find that morally shocking. The constituency he represents is extremely deprived in parts.’

Post-conventional Stage 6. Some critics went further, arguing that MPs enjoyed a position of trust. They should not abuse this by claiming for categories of expenses that were not entirely necessary to carry out their duties. ‘It’s not a question of what the rules were. If he and others cannot and did not see what they were doing as morally wrong, then it’s time to move aside.’


3 Practical situations

FAST FORWARD             Exam questions will often be founded on what should be done if breaches of laws, regulations or ethical guidelines occur. Close relationships between the parties or other conflicts of interest will often be a complication.

3.1 Examination questions

Examination questions will expect you to be able to apply your understanding of ethical issues to practical problems arising in organisations. Later in this chapter we are going to see how to deal with such questions, but first we are going to take the bare bones of a situation and see how it might be built up into the kind of scenario you will have to face.

3.2 The problem

The exam may present you with a scenario, typically containing an array of detail of which much is potentially relevant. The problem, however, will be one or other of two basic types.

  • A wishes B to do C which is in breach of D where A = a situation, person, group of people, institution or the like
    • = you/an accountant, the person with the ethical dilemma
    • = acting, or refraining from acting, in a certain way
    • = an ethical principle, quite possibly one of ACCA’s fundamental principles
  • Alternatively, the problem may be that A has done C, B has become aware of it and D requires some kind of response from B.

3.3 Example: the problem

An accountant joined a manufacturing company as its Finance Director. The company had acquired land on which it built industrial units. The Finance Director discovered that, before they had started at the company, one of the units had been sold and the selling price was significantly larger than the amount which appeared in the company’s records. The difference had been siphoned off to another company – one in which their boss, the Managing Director, was a major shareholder. Furthermore, the Managing Director had kept their relationship with the second company a secret from the rest of the board.

The Finance Director confronted the Managing Director and asked them to reveal their position to the board. However, the Managing Director refused to disclose their position to anyone else. The secret profits on the sale of the unit had been used, they said, to reward the people who had secured the sale. Without their help, they added, the company would be in a worse position financially.

The Finance Director then told the Managing Director that unless they reported to the board they would have to inform the board members themselves. The Managing Director still refused. The Finance Director disclosed the full position to the board.

The problem is of the second basic type. B is of course the easiest party to identify. Here it is the Finance Director. A is clear, as well; it is the Managing Director. C is the MD’s breach of their directorial duties regarding related party transactions not to obtain any personal advantage from their position of director without the consent of the company for whatever gain or profit they have obtained. D is the principle that requires B not to be a party to an illegal act. (Note that we distinguish between ethical and legal obligations. B has legal obligations as a director of the company. They have ethical obligations not to ignore their legal obligations. In this case the two amount to the same thing.)

3.4 Relationships

You may have a feeling that the resolution of the problem described above is just too easy, and you would be right. This is because A, B, C and D are either people, or else situations involving people, who stand in certain relationships to each other.

  • A may be B’s boss, B’s subordinate, B’s equal in the organisational hierarchy, B’s husband, B’s friend.
  • B may be new to the organisation, or well established and waiting for promotion, or ignorant of some knowledge relevant to the situation that A possesses or that the people affected by C possess.
  • C or D, as already indicated, may involve some person(s) with whom B or A have a relationship – for example the action may be to misrepresent something to a senior manager who controls the fate of B or A (or both) in the organisation.



Identify the relationships in the scenario above. What are the possible problems arising from these relationships?



The MD is the Finance Director’s boss. They are also a member of the board and longer established as such than B, the Finance Director.

In outline, the problems arising are that by acting ethically the Finance Director will alienate the MD. Even if the problem were to be resolved the episode would sour all future dealings between these two parties. Also, the board may not be sympathetic to the accusations of a newcomer. The Finance Director may find that they are ignored or even dismissed.


Relationships should never be permitted to affect ethical judgement. If you knew that your best friend at work had committed a major fraud, for example, integrity would demand that as a last resort you would have to bring it to the attention of somebody in authority. But note that this is only as a last resort. Try to imagine what you would do in practice in this situation.

Surely your first course would be to try to persuade your friend that what they had done was wrong, and that they themselves had an ethical responsibility to own up. Your second option, if this failed, might be to try to get somebody (perhaps somebody outside the organisation) that you knew could exert pressure on your friend to persuade them to own up.

There is obviously a limit to how far you can take this. The important point is that just because you are dealing with a situation that involves ethical issues, this does not mean that all the normal principles of good human relations and good management have to be suspended. In fact this is the time when such business principles are most important.

3.5 Consequences

Actions have consequences and the consequences are quite likely to have their own ethical implications (remember the teleological approach we covered earlier in this chapter).

In the example given above, we can identify the following further issues.

  • The MD’s secret transaction appears to have been made in order to secure the sale of an asset, the proceeds of which are helping to prop up the company financially. Disclosure of the truth behind the sale may mean that the company is pursued for compensation by the buyer of the site. The survival of the company as a whole may be jeopardised.
  • If the truth behind the transaction becomes public knowledge this could be highly damaging for the company’s reputation, even if it can show that only one person was involved.
  • The board may simply rubber stamp the MD’s actions and so the Finance Director may still find that they are expected to be party to dishonesty. (This assumes that the company as a whole is amoral in its approach to ethical issues. In fact the MD’s refusal to disclose the matter to the board suggests otherwise.)

In the last case we are back to square one. In the first two cases, the Finance Director has to consider the ethicality or otherwise of taking action that could lead to the collapse of the company, extensive redundancies, unpaid creditors and shareholders, and so on.

3.6 Actions

In spite of the difficulties, your aim will usually be to reach a satisfactory resolution to the problem. The actions that you recommend will often include the following.

  • Informal discussions with the parties involved
  • Further investigation to establish the full facts of the matter. What extra information is needed?
  • The tightening up of controls or the introduction of new ones, if the situation arose due to laxity in this area; this will often be the case and the principles of professional competence and due care and of technical standards will usually be relevant
  • Attention to organisational matters such as changes in the management structure, improving communication channels, attempting to change attitudes



Your finance director has asked you to join a team planning a takeover of one of your company’s suppliers. An old schoolfriend works as an accountant for the company concerned, the finance director knows this, and has asked you to try and find out ‘anything that might help the takeover succeed, but it must remain secret’.



There are three issues here. Firstly you have a conflict of interest as the finance director wants you to keep the takeover a secret, but you probably feel that you should tell your friend what is happening as it may affect their job.

Second, the finance director is asking you to deceive your friend. Deception is unprofessional behaviour and will break your ethical guidelines. Therefore the situation is presenting you with two conflicting demands. It is worth remembering that no employer should ask you to break your ethical rules.

Finally, the request to break your own ethical guidelines constitutes unprofessional behaviour by the finance director. You should consider reporting them to the relevant body.


In an internal company role, ethical problems could be in the following forms.

•              Conflict of duties to different staff superiors

•              Discovering an illegal act or fraud perpetrated by the company (ie its directors)

•              Discovering a fraud or illegal act perpetrated by another employee

•              Pressure from superiors to take certain viewpoints, for example towards budgets (pessimistic/ optimistic etc) or not to report unfavourable findings

Exam focus point

4 Frameworks for dealing with ethical situations

                                 4.1 Dealing with questions                                        6/10, 6/14

In a situation involving ethical issues, there are practical steps that should be taken.

•                  Analysis of the situation

•                  Identifying the ethical issues

•                  Considering the alternative options

•                  Stating the best course of action based on the steps above    Justifying your recommendations

The AAA and Tucker models can be used to resolve ethical dilemmas.


An article in a student magazine contained the following advice for candidates who wish to achieve good marks in ethics questions. (The emphasis is BPP’s.)

‘The precise question requirements will vary, but in general marks will be awarded for:

  • Analysis of the situation
  • A recognition of ethical issues
  • Explanation if appropriate of relevant part of ethical guidelines, and interpretation of its relevance to the question
  • Making clear, logical and appropriate recommendations for action. Making inconsistent recommendations does not impress examiners
  • Justifying recommendations in practical business terms and in ethical terms

As with all scenario-based questions there is likely to be more than one acceptable answer, and marks will depend on how well the case is argued, rather than for getting the “right” answer.’

As well as helping you deal with ethical situations in the P1 exam, this section will also help you demonstrate the competencies you need to fulfil performance objective 1 of the PER. In particular it will help you deal with situations where your professional ethics, values and judgements are challenged.

4.1.1 Weaknesses in answers

Possibly the most common fault in students’ answers to questions on ethics is that they include large amounts of unanalysed detail copied out from the question scenarios in their answers. This earns no marks.

Other things to avoid doing include:

Paraphrasing the question This doesn’t add anything.
Regurgitating the Ethical Guidelines  As in other areas of the exam, you won’t get any credit unless you apply relevant knowledge.
Failing to make a decision or failing to recommend action if asked  The examiner may ask you to consider different viewpoints, but if you are asked to advise or recommend you must do so.
Justifying your decision merely by saying

‘This should be done because it’s ethical’

That won’t convince the marker. Stronger justification will be necessary.

4.2 Justifying your decision

The article quoted above says that marks will be awarded for ‘justifying recommendations in practical business terms and in ethical terms’. A good example is set out below.

‘Perhaps the first thing to do is to report the whole matter, in confidence and informally, to the chief internal auditor with suggestions that a tactful investigation is undertaken to verify as many of the facts as possible. The fact that the sales manager has already been tackled (informally) about the matter may be a positive advantage as he/she may be recruited to assist in the investigation. It could however be a problem as the information needed for further investigation may have already been removed. Tact is crucial as handling the matter the wrong way could adversely influence the whole situation. An understanding of who participants are and how they are implicated can be used positively to bring about change with the minimum of disruption.’

4.3 Ethics models

In the exam you may be asked to consider an ethical decision and how you do so is left up to you. In other instances you may be asked to use a specific model. Two models highlighted by the examiner are:

         American Accounting Association model              Tucker’s 5 question model

You can also use these models if the choice is left up to you.

                                 4.4 American Accounting Association (AAA) model  12/09

The AAA model was set out in a report by Langenderfer and Rockness in 1990. They recommended a seven-step model:

Step Question Approach to use in answers
1 What are the facts of the case? The aim is to show clearly what is at issue. A brief summary should suffice, maybe just one sentence.
2 What are the ethical issues in the case? These should be based on the facts.
3 What are the norms, principles and values related to the case? This means placing the decision in its social, ethical and professional behaviour context, including considering professional codes of ethics or social expectations of the profession. Use the terminology of the ethical guidelines, for example fairness, bias and influence when discussing objectivity. Don’t be afraid to use the term justice if that’s most appropriate.
4 What are the alternative courses of action? State each course without making reference at this stage to the norms, principles and values. To generate ideas, consider the issue from the points of view of the ‘guilty’ party and the organisation.
5 What is the best course of action that is consistent with the norms, principles and values identified in Step 3? Combine Steps 3 and 4 to see which options accord with the norms and which don’t.
6 What are the consequences of each possible course of action?  This is to ensure that each of the outcomes are unambiguous.
7 What is the decision? This is based on the analysis in Steps 1-6.



Cadge is a clothing manufacturer based in Europe that supplies various large retail groups. Over the last two years it has suffered falls in profits due to the loss of a couple of large contracts and a general fall in demand for its clothes. Industry opinion is that Cadge has failed to innovate sufficiently in its clothing designs.

A few days ago an unknown factory owner based outside Europe contacted Cadge’s Design Director out of the blue. He introduced himself only as ‘Mr Sim’, and offered to sell – for what appeared to be a reasonable sum of money – the new up and coming season’s designs belonging to one of Cadge’s key competitors who was using Sim’s factories to manufacture its goods. If these designs could be purchased by Cadge and launched onto the market before the competition could launch theirs, Cadge’s profitability for the coming year could significantly increase.


Analyse, using the American Accounting Association model, the decision of whether to accept Mr Sim’s offer.



What are the facts of the case?

The facts are that the company has been offered some designs that appear to have been stolen.

What are the ethical issues in the case?

The ethical issue is whether to gain a business advantage by using designs that belong to someone else.

What are the norms, principles and values related to the case?

Accepting the offer is likely to be illegal in Cadge’s home country or illegal under international design protection laws. Even if the action could be justified as legal, it would demonstrate a lack of honesty and integrity if Cadge used designs that belonged to someone else whom it had not paid.

What are the alternative courses of action?

  • Reject Mr Sim’s offer.
  • Accept Mr Sim’s offer, pay Mr Sim money and use the designs.

What is the best course of action that is consistent with the norms, principles and values identified in Step 3?

The best course of action is Option 1, as accepting the designs would be dishonest. The directors would need to decide whether to have no further dealings with Mr Sim, or to whistleblow on him to the competitors.

What are the consequences of each possible course of action?

  • Cadge will not be able to gain a competitive advantage.
  • Cadge may be able to gain a temporary advantage, but the consequences if the transaction is discovered could be severe. Cadge’s customers are likely to view this activity unfavourably and this could jeopardise existing contracts. The board may come under pressure from other shareholders who find this behaviour unacceptable.

What is the decision?

The ethical decision in Option 1, to refuse Mr Sim’s offer.

5 Tucker’s 5 question model                                                           12/08, 12/12

Tucker’s model can also be used to determine the most ethical outcome in a particular situation, generally an ethical problem for business. It focuses on five key questions. Is the decision:

  • Profitable
  • Legal  Fair
  • Right
  • Sustainable

Not all of Tucker’s criteria will be relevant in every situation. In addition, there are complications with each of the criteria.

Is the decision:  
Profitable?  Compared with what? Use of profitability as criteria also implies the Tucker model may be more useful for business decisions than for individuals’ moral dilemmas
Legal?  This obviously depends on the jurisdiction(s) involved
Fair?  In whose perspective? Need to consider who stakeholders are and the impact of the decision on them
Right?  This depends on the ethical position; in particular the distinction between

deontological and teleological approaches of whether account should be taken of the consequences of the transaction is significant

Sustainable? Is the decision environmentally sound or sustainable in other ways?


December 2008 Question 1 included a good illustration of how an ethical decision could be analysed using Tucker’s model.
Exam focus point



Refuse Recycling (RR) is a large recycling company, which collects waste and recycles a large variety of products. Its most profitable product for recycling is glass, although it also collects other materials including plastics. Most of the plastics it collects are under local government contracts for domestic waste collection and recycling. Because RR lacks facilities and expertise in the recycling of plastics, the plastic waste it collects is sorted by item/type and transported long distances to specialised plastic recycling plants operated by other recycling companies.

For some time now the board of RR has been concerned about reduced margins. As a result of a study initiated by the finance director, the company has established that the collection and recycling of plastics is proving unprofitable. Transportation costs have been extremely high, as many recycling operators have not been accepting plastics collected by RR in the hope that this would make the contracts less profitable for RR. They believed this would increase their own chances of winning future tenders.

The chairman of RR recently called a board meeting to examine the terms of the company’s existing contracts with local governments for domestic waste collection and recycling. At this meeting the finance director stated that, though he felt strongly about the value of recycling to society as a whole, he also felt that RR simply should not continue to perform unprofitable activities if there was ‘a way out’.

On examining the contracts the board discovered that several specified an overall percentage of material collected that must be recycled of 70% (others specified 80%). Based on the volumes of paper, glass, metal and plastics collected over the past year, the board decided that in some locations RR could meet a contractual obligation of 70% without recycling any plastics at all. Plastic collected under these ‘70% contracts’ could simply be dumped at landfill sites, with significant savings from reduced sorting and transport costs. Some board members had reservations about implementing this policy, but were swayed by the strength of the finance director’s reasoning.

The dumping of plastics is about to start. Although the board of RR feels the company’s actions do not breach the terms of their contracts, it was decided that the vehicles involved in the dumping process would not carry the RR name.


Analyse the board’s decision to dump plastics at landfill sites, using Tucker’s 5 question model.



Using Tucker’s five question model, we have to ask, is the decision:


The main justification for the decision is to increase short-term profitability and if the finance director’s figures are correct, that aim has been achieved. However, the effect on long-term profitability may be very different if what RR has done becomes public. A recycling company, even one operating in a commercial environment, must be seen as caring about the environment if it is to attract and retain customers. Some local government customers may try to cancel existing contracts on the grounds that RR is not abiding by the spirit of these contracts. In any case local government agencies are likely to be unwilling to renew contracts and RR may be unable to win other new contracts.  


Clearly RR is using legal landfill sites. Assuming the board has interpreted the contracts correctly, the company has not breached the strict legal terms of the contract even if it has possibly breached the spirit. Transporting the waste in unmarked vans may be questionable legally though.


If the view is taken that the customers are vital stakeholders, then what RR is doing is unfair to them, as they may have made claims about the support they are giving to recycling which are unintentionally misleading. Any loss of reputation that local authorities suffer in the fallout that follows discovery of what RR has done may be particularly serious, as it may impact on re-election chances of local councillors. The only mitigation for RR under this heading is that the problem has arisen because of other recycling operators refusing to take RR’s waste. They too appear to be putting their commercial interests ahead of the objective of supporting recycling.  


The fact that the waste is being transported in unmarked vans is effectively an admission by the board that what they are doing is indefensible on moral grounds. Any mitigation may be based on other criteria, that RR is acting within the law and doing its best for its shareholders, but it is nearly impossible to defend the actions on these grounds.  


This is potentially the easiest criterion of them all, as what RR is doing appears to be going against environmental best practice. Apart from anything else, RR’s ability to continue doing this depends on the availability of landfill sites. In some countries they are running out. The only environmental justification is that by using the landfill sites, RR is cutting down the miles plastics are transported, and is reducing its carbon footprint to that extent.


If you are asked to apply either the AAA model or Tucker’s model, but struggle to apply certain stages of either model, say so in your answer. The examiner wants you to identify the weaknesses in any model you are asked to use.  
Exam focus point



How would different people operating at each of Kohlberg’s levels of ethical reasoning view Tucker’s criteria? (Kohlberg’s three levels are pre-conventional, conventional and post-conventional.)



Here are some suggestions, although this is not a definitive answer.

  Pre-conventional Conventional Post-conventional
Profitable  A very important criteria, as the preconventional level is based on the idea of rewards for self. Profitability may be seen as quite important depending on the local ethos – very important if the decisionmaker works in a major financial centre for example. Decision-makers will also be influenced by any local requirements in company law to seek profit maximisation. Surprisingly perhaps this could be a very important criterion. Equally it could have no importance if the decisionmaker believes it goes against other concepts. Those holding the pristine capitalist viewpoint (discussed further in Chapter 11) would argue that companies have a moral duty to make profits to reward the shareholders whose finance underwrites their existence. Use of monies for other purposes is effectively theft of shareholders’ funds under this stance.
Legal The pre-conventional level will be more concerned with the consequences of breaking the law than its content. At the higher conventional level this will be seen as allimportant. At the lower level it may depend on the views of local society, some societies having a more relaxed view to certain laws than others. Strangely, obedience to the law may not be seen as so significant at this level. This is because post-conventional viewpoint may see the law as inadequately defining ethics and thus decision-makers need to go beyond it. Alternatively some laws may be seen as immoral (for example, requiring the decision-maker to swear allegiance to a cause with which they disagree).
Fair The concept of fairness is likely to be interpreted as confined to fairness to the decision-maker alone. Fairness may be significant if it means fairness to others in society whose approval is sought, or fairness is a concept enshrined in law. Fairness may well be a key ethical concept, but fairness to whom may be a difficult issue, dependent on who are seen as legitimate stakeholders.
  Pre-conventional Conventional Post-conventional
Right The consequences of being caught doing wrong are more likely to be an issue than whether the decision is actually right. The decision-maker will see what is right as significant, but they will see right as defined by others in their local society or right as enshrined in law. The decision-maker may not be able to supply their own definition of what is right. Right will always be important for post-conventional decisionmakers. Remember though the distinction between the two levels at this stage. Right may be as defined by the decisionmaker’s society’s ethics or it may be outside society’s ethics.
Sustainable Again the consequences for the decision-maker rather than anyone else will be paramount. This depends on how sustainability is viewed in the decision-maker’s local environment, or the importance given to it in law. The campaigns conducted by many organisations internally to improve sustainability awareness are perhaps an acknowledgement that many of their employees are taking decisions at this level. Thus the

organisations are trying to change the ethos to make employees behave in a more socially responsible way.

Sustainability may well be a key ethical concept for postconventional decision-makers, although what sustainability means exactly may cause problems (discussed further in Chapter 11).


Chapter Roundup

A key debate in ethical theory is whether ethics can be determined by objective, universal principles. How important the consequences of actions should be in determining an ethical position is also a significant issue.




Ethical decision-making is influenced by individual and situational factors.

Individual factors include age and gender, beliefs, education and employment, how much control individuals believe they have over their own situation and their personal integrity.

Kohlberg’s framework relates to individuals’ degree of ethical maturity, the extent to which they can take their own ethical decisions.

Situational factors include the systems of reward, authority and bureaucracy, work roles, organisational factors, and the national and cultural contexts.

Exam questions will often be founded on what should be done if breaches of laws, regulations or ethical guidelines occur. Close relationships between the parties or other conflicts of interest will often be a complication.






In a situation involving ethical issues, there are practical steps that should be taken.

–             Analysis of the situation

–             Identifying the ethical issues

–             Considering the alternative options

–             Stating the best course of action based on the steps above

–             Justifying your recommendations

The AAA and Tucker models can be used to analyse ethical dilemmas.

Quick Quiz

  • Which view of ethics states that right and wrong are culturally determined?
    • Ethical relativism C Teleological B       Cognitivism          D Deontological
  • Fill in the blank:

The …………………………………. approach to ethics is to make moral judgements about courses of action by reference to their outcomes or consequences.

  • In what areas of national and cultural beliefs has Hofstede identified significant differences?
  • At which stage of the Kohlberg model do individuals make their own ethical decisions in terms of what they believe to be right, not just acquiescing in what others believe to be right?
    • Pre-conventional C Post-conventional
    • Conventional
  • Fill in the blank:

The …………………………………. is the amount of influence individuals believe they have over the course of their own lives.

  • What are the six criteria that Jones suggests will be used to determine how significant an ethical issue is?
  • What are the seven stages of the AAA model?
  • What are the five questions in the Tucker model?

Answers to Quick Quiz

  • A Ethical relativism
  • Teleological or consequentialist
  •  Individualism vs collectivism
    • Acceptance of unequal distribution of power and status
    • How much individuals wish to avoid uncertainties
    • Masculinity vs femininity, money and possessions vs people and relationships
  • C Post-conventional
  • Locus of control
  •  Magnitude of consequences
    • Social consequences
    • Probability of effect
    • Temporal immediacy
    • Proximity
    • Concentration of effect
  •  What are the facts of the case?
    • What are the ethical issues in the case?
    • What are the norms, principles and values related to the case?
    • What are the alternative courses of action?
    • What is the best course of action that is consistent with the norms, principles and values identified in Step 3?
    • What are the consequences of each possible course of action?  What is the decision?
  • Is the decision:
    • Profitable
    • Legal 
    • Fair
    • Right
    • Sustainable



Number Level Marks Time
Q9 Examination 25 49 mins

10Professional ethics

In this chapter we examine how organisations and professional bodies
encourage ethical behaviour. In Section 1 we look at corporate codes, covering
their contents and impact.
In Section 2 we discuss the main features of professional codes. As with
governance codes, a key issue is whether the guidance should be based on
principles or on detailed rules. Section 3 examines independence issues that
affect accountants in practice. You will have covered these before, but we recap
them as they are emphasised in the study guide.
In Section 4 we look in detail at the role of accountants in business and the
ethical problems that they face and focus on bribery and corruption in Section
Lastly we go beyond the concepts of ethical codes to discuss the wider context
of serving the public interest. Defining an acceptable position for the profession
has proved very difficult, partly because of the varying definition of public
interest, and how much weight to give the interests of different stakeholders

Study guide

    Intellectual level
B2 Internal control, audit and compliance in corporate governance  
(b) Explain and discuss the importance of auditor independence in all client-auditor situations (including internal audit). 3
(c) Explain and assess the nature and sources of risks to auditor independence. Assess the hazard of auditor capture. 3
E3 Professions and the public interest  
(a) Explain and explore the nature of a profession and professionalism. 2
(b) Describe and assess what is meant by the public interest. 2
(c) Describe the role of, and assess the influence of, accounting as a profession in the organisational context. 3
(d) Analyse the role of accounting as a profession in society. 2
(e) Recognise accounting’s role as a value-laden profession capable of influencing the distribution of power and wealth in society. 3
(f) Describe and critically evaluate issues surrounding accounting and acting against the public interest. 3
E4 Professional practice and codes of ethics  
(a) Describe and explore the areas of behaviour covered by corporate codes of ethics. 3
(b) Describe and assess the content of, and principles behind, professional codes of ethics. 3
(c) Describe and assess the codes of ethics relevant to accounting professionals such as the IESBA (IFAC) or professional body codes. 3
E5 Conflicts of interest and the consequences of unethical behaviour  
(a) Describe and evaluate issues associated with conflicts of interest and ethical conflict resolution. 3
(b) Explain and evaluate the nature of impacts of ethical threats and safeguards. 3
(c) Explain and explore how threats to independence can affect ethical behaviour. 3
(d) Explain and explore ‘bribery’ and ‘corruption’ in the context of corporate governance, and assess how these can undermine confidence and trust. 3
(e) Describe and assess best practice measures for reducing and combating bribery and corruption, and the barriers to implementing such measures. 3
E6 Ethical characteristics of professionalism  
(b) Explain and analyse issues related to the application of ethical behaviour in a professional context. 2
(c) Describe and discuss rules-based and principles-based approaches to resolving ethical dilemmas encountered in professional accounting. 2

Exam guide

You may gain a few marks for describing basic ethical threats, but the main focus in questions on ethics will be on practical situations. In these situations the ethical issues, or at any rate the solutions, will not be clear-cut. Although resignation or withdrawing from an audit or assurance engagement may be the last resort that has to be adopted in certain circumstances, it will not always be the solution.

Although we have quoted from IESBA and ACCA guidance as obvious examples of best practice, the examiner has emphasised that these are not the only sources of ethical guidance. Using examples from other, relevant codes will also gain you credit.

You should also expect to see some discussion questions on the neutrality (or otherwise) of the accountancy profession and whether its activities unduly support certain interests in society.

1 Corporate codes of ethics

Organisations have responded to pressure to be seen to act ethically by publishing ethical codes, setting out their values and responsibilities towards stakeholders.


1.1 Corporate codes and corporate culture

Exam focus       An examination question may include an extract from a set of corporate guidelines on which you will be point          expected to comment. Even if you are not given specific information about a company’s ethical policy, though, remember that all organisations have ethical standards. There will be something in the information that you are given that will give some indication of the ethical values held by the people or departments involved.

You may also be asked to criticise or evaluate a code of ethics, to interpret actions in a case scenario in the light of a code or to argue the pros and cons of adopting corporate codes of ethics.



Here are some extracts from an article that appeared in the UK Financial Times.

‘Each company needs its own type of code: to reflect the national culture, the sector culture, and the exact nature of its own structure.

The nature of the codes is changing. NatWest’s code, for example, tries to do much more than simply set out a list of virtues. Its programme involves not only the production of a code, but a dedicated effort to teach ethics, and a system by which the code can be audited and monitored.

For example, it has installed a ‘hot-line’ and its operation is monitored by internal auditors. The board of NatWest wanted it to be confidential – within the confines of legal and regulatory requirements – and the anonymity of ‘whistle-blowers’ has been strictly maintained.

The code contains relevant and straightforward advice. For example: “In recognising that we are a competitive business, we believe in fair and open competition and, therefore, obtaining information about competitors by deception is unacceptable. Similarly, making disparaging comments about competitors invariably invites disrespect from customers and should be avoided.” Or: “Employment with NatWest must never be used in an attempt to influence public officials or customers for personal gain or benefit.”

Jonathan Bye, manager of public policy at NatWest, said the bank is continually looking at ways of refreshing the code and measuring its effectiveness.’

How would you suggest that the effectiveness of a company’s policy on ethics could be measured?


Some ideas that you might think through are:

  • Training effectiveness measures
  • How breaches of the code are dealt with
  • Activity in the ethics office
  • Public perceptions of the company

Try to flesh them out and think of some other ideas. The extract above should suggest some.


                                 1.2 Company code of ethics                                  12/08, 12/11

An ethical code typically contains a series of statements setting out the organisation’s values and explaining how it sees its responsibilities towards stakeholders.

Codes of corporate ethics normally have the following features.

  • They focus on regulating individual employee behaviour.
  • They are formal documents.
  • They cover specific areas such as gifts, anti-competitive behaviour, and so on.
  • Employees may be asked to sign that they will comply.
  • They may be developed from third-party codes (eg regulators) or use third parties for monitoring.
  • They tend to mix moral with technical imperatives.
  • Sometimes they do little more than describe current practices.
  • They can be used to shift responsibility (from senior managers to operational staff).
                                  1.2.1 Purposes of code of ethics                                                    6/14
  • Establishment of organisation’s values

Ethical codes form part of the organisation’s underlying environment. They develop and promote values that are linked to the organisation’s mission statement.

  • Promotion of stakeholder responsibilities

Codes also demonstrate whom the organisation regards as important stakeholders. They show what action should be taken to maintain good stakeholder relationships (such as keeping them fully informed). They can show external stakeholders that they are dealing with people who do business fairly. Drafting parts of the code to comply with customer wishes demonstrates that businesses are responsive to customers.

  • Control of individuals’ behaviour

By promoting or prohibiting certain actions, ethical codes form part of the human resources mechanisms by which employee behaviour is controlled. All staff should be aware of the importance of the ethical code and it should be referred to when employee actions are questioned.

  • Promotion of business objectives

Codes can be an important element in a company’s strategic positioning. Taking a strong stance on responsibility and ethics and earning a good ethical reputation can enhance appeal to consumers in the same way as producing the right products of good quality can.

  • Conveying values to stakeholders

The code is a communications device, not only acting to communicate between partners and staff,          but also increasing the transparency of the organisation’s dealings with its stakeholders.

1.2.2 Example of code of ethics
  Typical statements in a corporate code
l The company conducts all its business on ethical principles and expects staff to do likewise.
l Employees are seen as the most important component of the company and are expected to work on a basis of trust, respect, honesty, fairness, decency and equality. The company will only employ people who follow its ethical ideals.
l Customers should be treated courteously and politely at all times, and the company should always respond promptly to customer needs by listening, understanding and then performing to the customer requirements.
l The company is dedicated to complying with legal or regulatory standards of the industry, and employees are expected to do likewise.
l The company’s relationship with suppliers and subcontractors must be based on mutual respect. The company therefore has responsibilities including ensuring fairness and truthfulness in all its dealings with suppliers including pricing and licensing, fostering long-term stability in the supplier relationship, paying suppliers on time and in accordance with agreed terms of trade and preferring suppliers and subcontractors whose employment practices respect human dignity.
l The company has a responsibility to: foster open markets for trade and investment, promote competitive behaviour that is socially and environmentally beneficial and demonstrates mutual respect among competitors, and refrain from either seeking or participating in questionable payments or favours to secure competitive advantages.
l A business should protect and, where possible, improve the environment, promote sustainable development and prevent the wasteful use of natural resources.
l The company has a responsibility in the community to: respect human rights and democratic institutions, and promote them wherever practicable, recognise government’s legitimate obligation to the society at large and support public policies and practices that promote human development through harmonious relations between business and other segments of society, collaborate with those forces in the community dedicated to raising standards of health, education, workplace safety and economic wellbeing, respect the integrity of local cultures, and be a good corporate citizen through charitable donations, educational and cultural contributions and employee participation in community and civic affairs.

Here are some suggestions.

  • Recruitment and selection policies and procedures
  • Induction and training
  • Objectives and reward schemes
  • Ethical codes
  • Threat of ethical audit


1.3 The impact of codes of conduct

A code of conduct can set out the company’s expectations, and in principle a code such as that outlined above addresses many of the problems that the organisations may experience. However, merely issuing a code is not enough.


  • The commitment of senior management to the code needs to be real, and it needs to be very clearly communicated to all staff. Staff need to be persuaded that expectations really have changed.
  • Measures need to be taken to discourage previous behaviours that conflict with the code.
  • Staff need to understand that it is in the organisation’s best interests to change behaviour and become committed to the same ideals.
  • Some employees – including very able ones – may find it very difficult to buy into a code that they perceive may limit their own earnings and/or restrict their freedom to do their job.
  • In addition to a general statement of ethical conduct, more detailed statements (codes of practice) will be needed to set out formal procedures that must be followed.



The co-operative bank pursues ethical policies through its banking and insurance divisions. Both are founded on the assumption that investors have no say in, and do not know how, other banks invest their money. The co-operative bank on the other hand consults its customers.

The banking division’s ethical policy has two sides to it. It seeks to encourage certain businesses or organisations, or certain business practices. For example, it supports charities, credit unions and community finance initiatives. It also supports businesses involved in recycling, renewable energy and sustainable natural products. On the other hand, it will not invest in businesses or practices that operate in areas of concern to customers. These include currency speculation, tobacco product manufacture, irresponsible marketing practices in developing countries, unsustainable harvesting of natural resources and animal testing of cosmetic or household products.

Co-operative Insurance’s ethical engagement policy is based on using its influence as a corporate shareholder to change companies from the inside. It has asked companies to seek modifications to the working conditions of Chinese factory workers and encouraged oil and energy companies to pursue biofuels with long-term potential for sustainable production. It focuses in particular on corporate governance practices such as directors’ pay, board appointments and treatment of employees.


1.4 Problems with codes of conduct
1.4.1 Inflexibility

Inflexible rules may not be practical. One example would be a prohibition on accepting gifts from customers. A simple prohibition that would be quite acceptable in a Western context would not work in other cultures, where non-acceptance might be seen as insulting.

1.4.2 Clarity

It is difficult to achieve completely unambiguous wording.

1.4.3 Irrelevancy

Surveys suggest that ethical codes are often perceived as irrelevant for the following reasons.

  • They fail to say anything about the sort of ethical problems that employees encounter.
  • Other people in the organisation pay no attention to them.
  • They are inconsistent with the prevailing organisational culture.
  • Senior managers’ behaviour is not seen as promoting ethical codes. Senior managers rarely blatantly fail to comply; rather they appear out of touch on ethics because they are too busy or unwilling to take responsibility.
One area explored by a question issued by the examiner was the justification for issuing a code of ethics. The viewpoints were roughly that a normative code is justified because being ethical is desirable in itself versus an instrumental code is justified if it gives strategic advantage and doesn’t cost too much.

Exam focus point

1.5 Identity and values guidance

Corporate ethical codes are often rather legalistic documents, consisting largely of prohibitions on specific undesirable actions such as the acceptance of gifts from suppliers. More general guidance with an emphasis on principles may be more appropriate.

Identity and values programmes describe corporate values without specifying in detail what they mean. Rather than highlighting compliance with negatives they promote positive values about the company and form part of its culture. (Compliance programmes are about limiting legal and public relations disasters.) Even so, they need to be integrated with a company’s values and leadership.

1.6 Other measures

To be effective, ethical guidance needs to be accompanied by positive attempts to foster guiding values, aspirations and patterns of thinking that support ethically sound behaviour – in short a change of culture.

Increasingly organisations are responding to this challenge by devising ethics training programmes for the entire workforce, instituting comprehensive procedures for reporting and investigating ethical concerns within the company, or even setting up an ethics office or department to supervise the new measures.



‘The view from the trenches’

Badaracco and Webb (1995) carried out in-depth interviews with 30 recent Harvard MBA graduates. They found that unethical behaviour appeared to be widespread in the middle layers of business organisations.

‘… in many cases, young managers received explicit instructions from their middle-manager              bosses or felt strong organisational pressures to do things that they believed were sleazy,        unethical, or sometimes illegal.’

However, these young managers categorised only a few of their superiors as fundamentally unethical. Most were basically decent, but were themselves pushed into requiring unethical behaviour by four strong organisational pressures.

  • Performance outcomes are what really count.
  • Loyalty is very important.
  • Don’t break the law.
  • ‘… don’t over-invest in ethical behaviour’.

The outcome of these pressures was a firm impression that ethical conduct was a handicap and a willingness to evade ethical imperatives an advantage in career progression.


You may need to discuss corporate ethical behaviour as part of a wider discussion on the control environment. There is a good example of this sort of question in the Pilot Paper.
Exam focus point


2 Professional codes of ethics


Professional codes of ethics apply to the individual behaviour of professionals and are often based on principles, supplemented by guidance on threats and safeguards.

2.1 Contents of professional codes

The International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants is a good illustration of how codes not just for accountants but for other professionals are constructed.

  • The Code begins by stating that it reflects the acceptance by the accountancy profession of the responsibility to act in the public interest.
  • The detailed guidance begins with establishment of fundamental principles of ethics.
  • The guide then supplies a conceptual framework that requires accountants to identify, evaluate and address threats to compliance, applying safeguards to eliminate the threats or to reduce them to an acceptable level.

Exam focus        Depressingly the examiner reported that in the December 2008 exam some students confused corporate point               and professional ethical codes.

2.1.1 Advantages of professional codes
  • Codes represent a clear statement that professionals are expected to act in the public interest, and act as a benchmark against which behaviour can be judged. They should thus enhance public confidence in the professions.
  • Codes emphasise the importance of professionals considering ethical issues actively and seeking to comply, rather than only being concerned with avoiding what is forbidden.
  • ACCA and IESBA codes state that they can be applied internationally. Local differences are not significant.
  • Codes can include detailed guidance, which should assist ethical decision-making.
  • Codes can include explicit prohibitions if necessary.
  • Codes prescribe minimum standards of behaviour that are expected.
2.1.2 Disadvantages of professional codes
  • Professional codes, with their identification of many different situations, can lose focus on key issues.
  • Evidence suggests that some treat codes as a set of rules to be complied with and ‘box-ticked’.
  • International codes such as the IESBA code cannot fully capture regional variations in beliefs and practice.
  • The value of international codes may be limited by their not being legally enforceable around the world (although ACCA can enforce sanctions against members for serious breaches).
  • Illustrative examples can be interpreted mistakenly as rules to follow in similar circumstances.
  • Giving a lot of illustrative examples in codes may give the impression that ethical considerations are primarily important only when accountants are facing decisions illustrated in the codes. They may downplay the importance of acting ethically when facing decisions that are not clearly covered in the codes.
2.2 Contents of professional codes

IESBA suggests that the sheer variety of threats to compliance with the fundamental principles mean that no guidance can cover every situation where there is a potential threat.

2.2.1 Advantages of principles-based guidance

IESBA suggests that requiring use of a principles-based conceptual framework rather than a set of specific rules is in the public interest for the following reasons.

  • It places the onus on the professional to consider actively relevant issues in a given situation, rather than just agreeing action with a checklist of forbidden items. It also requires him to demonstrate that a responsible conclusion has been reached about ethical issues.
  • It prevents professionals from interpreting legalistic requirements narrowly to get around the ethical requirements. There is an extent to which rules engender deception, whereas principles encourage compliance.
  • It allows for variations that are found in every individual situation. Each situation is likely to be different.
  • It can accommodate a rapidly changing environment, such as the one in which auditors are.
  • It can include examples to illustrate how the principles are applied.
2.2.2 Disadvantages of principles-based guidance
  • As ethical codes cannot include all circumstances and dilemmas, accountants need a very good understanding of the underlying principles.
  • A principles-based code can be difficult to enforce legally, unless the breach of the code is blatant. Most are therefore voluntary and perhaps therefore less effective.
A question in the Pilot Paper asked whether the benefits of codes of ethics outweighed the costs of producing them.

Exam focus point

2.3 Accountancy ethical codes

ACCA publishes guidance for its members, the Code of Ethics and Conduct. IESBA publishes a Code of Ethics for Professional Accountants. Both are based on the same fundamental principles.

You need this knowledge not only to answer questions in the exam, but also to fulfil part of performance objective 1 of the PER, the competency to inform clients about the ethical standards that apply to professional activities.

                                 2.4 Fundamental principles                                                  6/10

These principles are designed to ensure that the accountant fulfils the public interest and meets the expectations of society.

Fundamental principles
Professional competence and due care Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.
Integrity Members should be straightforward and honest in all business and professional relationships.
Professional behaviour Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.


Fundamental principles
Confidentiality Members should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper or specific authority or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties.
Objectivity Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.
2.5 Ethical threats to compliance with the fundamental principles for

accountants in practice                                      6/11, 6/14

Both IESBA and ACCA identify certain ethical threats to compliance with the fundamental principles.

Threat Definition  Examples
Self-interest  Financial or other interests of a professional accountant or of an immediate family member inappropriately influence judgement or behaviour Having a financial interest in a client
Self-review Evaluation of a judgement by the accountant who made the judgement, or a member of the same organisation Auditing financial statements prepared by the firm
Advocacy  Accountant promoting a position or opinion to the point where objectivity may be compromised Advocating the client’s case in a lawsuit
Familiarity A close relationship resulting in excessive trust in, or sympathy for, others Audit team member having family at the client
Intimidation Accountant not acting objectively because of actual or perceived  pressures Threats of replacement due to disagreement

As we shall see in the next section, these threats are particularly relevant in the context of threats to independence.

                                  2.6 Ethical safeguards for accountants in practice       6/14

There are two general categories of ethical safeguard identified in the IESBA and ACCA guidance.

  • Safeguards created by the profession, legislation or regulation
  • Safeguards within the assurance client/the firm’s own systems and procedures
2.6.1 Examples of ethical safeguards created by the profession, legislation or regulation
  • Educational training and experience requirements for entry into the profession
  • Continuing professional development requirements
  • Corporate governance regulations
  • Professional standards
  • Professional or regulatory monitoring and disciplinary procedures

The International Federation of Accountants (IFAC) issues ethical standards (via IESBA), quality control standards and auditing standards that work together to ensure independence is safeguarded and quality audits are carried out.

2.6.2 Examples of ethical safeguards in the firm’s own systems and procedures

If ACCA members work for an accountancy practice, the firm should have the following safeguards in place in relation to the firm.

  • The firm’s leadership stressing compliance with fundamental principles
  • Leadership of the firm establishing the expectation that employees will act in the public interest
  • Quality control policies and procedures
  • Documented policies on identification and evaluation of threats and identification and application of safeguards
  • Documented policies covering independence threats and safeguards in relation to assurance engagements
  • Documented internal procedures requiring compliance with fundamental principles
  • Policies and procedures enabling identification of interests and relationships between the firm’s team and clients
  • Policies and procedures to manage reliance on revenue from a single client
  • Using different teams for non-assurance work
  • Prohibiting individuals who are not team members from influencing the outcome of the engagement
  • Timely communication of policies and procedures and appropriate training and education
  • Designating a senior manager to be responsible for overseeing quality control
  • Advising staff of independence requirements in relation to specific clients
  • Disciplinary measures
  • Promotion of communication by staff to senior management of any ethical compliance issue that concerns them

There should also be safeguards relating to specific assignments:

  • Involving an additional professional accountant to review the work done or otherwise advise as necessary
  • Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant
  • Rotating senior personnel
  • Discussing ethical issues with those in charge of client governance
  • Disclosing to those charged with governance the nature of services provided and extent of fees charged
  • Involving another firm to perform or re-perform part of the engagement
  • Rotating senior assurance team personnel
2.7 Ethical threats to compliance with the fundamental principles for accountants in business
Threat Examples
Self-interest  Financial interests, loans and guarantees, incentive compensation arrangements, personal use of corporate assets, external commercial pressures, acceptance of a gift
Self-review Business decisions being subject to review and justification by the same accountant responsible for making those decisions or preparing the data supporting them


Threat Examples
Advocacy  Furthering the employer’s cause aggressively without regard to reasonableness of statements made (furthering legitimate goals of employer organisation would not generally create an advocacy threat)
Familiarity Long association of a business contact
Intimidation Threats of dismissal from employment, influence of a dominant personality
2.8 Ethical safeguards for accountants in business

The safeguards created by the profession, legislation or regulation also apply to accountants in business.

2.8.1 Ethical safeguards in the workplace for accountants in business
  • The employer’s oversight systems
  • The employer’s ethics and conduct programmes
  • Recruitment procedures
  • Strong internal controls
  • Appropriate disciplinary processes
  • Leadership that stresses ethics
  • Policies and procedures that promote and monitor employee performance
  • Timely communication of the employer’s policies and procedures to all employees
  • Training and education of employees
  • Whistleblowing provisions
  • Consultation with another professional accountant

In other words, a strong control environment.

However, if these safeguards are ineffective, the professional accountant may have to seek legal advice or resign.

2.9 Ethical conflict resolution

The IESBA Code states that firms should have established policies to resolve conflict and should follow those established policies.

Professional accountants should consider:

  • The facts
  • The ethical issues involved
  • Related fundamental principles
  • Established internal (firm) procedures
  • Alternative courses of action, considering the consequences of each
2.10 Ethical codes and Kohlberg’s guidance

One key aim of a principles-based ethical code is in effect to move subjects to levels of reasoning as defined in Kohlberg’s framework. The principles are meant to provide ideals towards which ethical decisions should aspire. The emphasis in the code that the examples given are not a comprehensive list of every situation that could be affected by the code indicates the expectation that the code is aiming beyond giving examples of common situations in which individuals follow set behaviour. It is aiming to encourage individuals to make their own ethical judgements.

2.11 Responsibilities to employer and responsibilities as a professional


Clearly there is a lot of overlap between an accountant’s employment and professional responsibilities. The professional body and (hopefully) the employer would expect the accountant to act with integrity and probity. Both would require the accountant to act with diligence and due care.

However, there may be conflict in the following areas.

  • Confidentiality

Confidentiality may be a major issue. An employer will wish for the employee to respect confidentiality about all sensitive matters both during and after the period of employment. Confidentiality is a professional duty too. However, the accountants may, in the public interest, have to report an errant employer to the relevant authorities.

  • Interests served

The employer may wish the accountant to put shareholder and commercial interests above all others. However, the accountant may believe that a duty is owed to a wider stakeholder group.

  • Organisational vs professional norms

Accountants may be said to owe a general duty to ‘fit in‘, be part of a team and behave in ways that are in accordance with the organisational culture of their employer. However, as members of a professional accounting body, accountants owe a duty to act in accordance with the norms of that body, including its stress on professional behaviour. These may not be in line with the employer’s culture.

  • Requirement for obedience

The employer may require obedience to its wishes even if it appears to conflict with the accountants’ professional duties.

Situations where professional and employer responsibilities conflict are likely to occur frequently in this exam. Question 4 in the Pilot Paper is an example.
Exam focus point

3 Independence and conflicts of interest 6/08,6/09,12/12, 12/14


Threats to independence of accountants in practice include self-interest, self-review, advocacy, familiarity and intimidation.

Accountants in practice may face conflicts of interest between their own and clients’ interests, or between the interests of different clients.

3.1 Independence

We have looked at independence guidelines relating to internal auditors in Chapter 8. You will have encountered the guidance relating to external auditors in your earlier studies, but we cover the main threats here. Both IESBA and ACCA list examples of threats to independence and applicable safeguards.

Exam focus        Remember it is important that you can apply the spirit of the guidance to a given situation in this exam point             rather than just learning and regurgitating the guidance. June 2009 Question 2 is a good example of an application question, where students had to assess the ethical threats implied by what an accountant said.

Independence is most important for accountants acting as auditors and assurance providers for the following reasons.

  • Reliability of financial information

Corporate governance reports have highlighted reliability of financial information as a key aspect of corporate governance. Shareholders and other stakeholders need a trustworthy record of directors’ stewardship to be able to take decisions about the company. Assurance provided by independent auditors is a key quality control on the reliability of information.


  • Credibility of financial information

An unqualified report by independent external auditors on the accounts should give them more credibility, enhancing the appeal of the company to investors. It should represent the views of independent experts, who are not motivated by personal interests to give a favourable opinion on the annual report.

  • Value for money of audit work

Audit fees should be set on the basis of charging for the work necessary to gain sufficient audit assurance. A lack of independence here seems to mean important audit work may not be done, and the shareholders are not receiving value for the audit fees.

  • Threats to professional standards

A lack of independence may lead to a failure to fulfil professional requirements to obtain enough evidence to form the basis of an audit opinion, here to obtain details of a questionable material item. Failure by auditors to do this undermines the credibility of the accountancy profession and the standards it enforces.

Most of the guidance also applies to accountants providing assurance services as well as audit.

Key term                An assurance engagement is one in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

There are two general types of assurance engagement.

  • An assertion-based engagement where the accountant declares that a given premise (assertion) is either correct or not
  • A direct reporting engagement where the accountant reports on issues that have come to their attention during their evaluation

Exam focus        June 2008 Question 2 asked about a number of different threats to independence.


                                 3.2 Self-interest threat                                                           6/11

The ACCA Code of Ethics and Conduct highlights a great number of areas in which a self-interest threat to independence might arise.


1 Financial interests
Financial interests exist where an audit firm has a financial interest in a client’s affairs; for example, the audit firm owns shares in the client, or is a trustee of a trust that holds shares in the client.

Key term

A financial interest in a client constitutes a substantial self-interest threat. According to both ACCA and IESBA, the parties listed below are not allowed to own a direct financial interest or an indirect material financial interest in a client.

  • The assurance firm
  • Partners in the same office as the engagement partner (and their immediate families)
  • A member of the assurance team
  • An immediate family member of a member of the assurance team The following safeguards will therefore be relevant.
  • Disposing of the interest
  • Removing the individual from the team if required
  • Keeping the client’s audit committee informed of the situation
  • Using an independent partner to review work carried out if necessary 2.2 Close business relationships

Examples of when a firm and client have an inappropriately close business relationship include:

  • Having a material financial interest in a joint venture with the assurance client
  • Arrangements to combine one or more services or products of the firm with one or more services or products of the assurance client and to market the package with reference to both parties
  • Distribution or marketing arrangements under which the firm acts as distributor or marketer of the assurance client’s products or services or vice versa

Again, it will be necessary to judge the materiality of the interest and therefore its significance. However, unless the interest is clearly insignificant, an assurance provider should not participate in such a venture with a client. Appropriate safeguards are therefore to end the assurance provision or to terminate the (other) business relationship.

3.2.3 Employment with client

It is possible that staff might transfer between a firm and a client, or that negotiations or interviews to facilitate such movement might take place. Both situations are a threat to independence.

  • An audit staff member might be motivated by a desire to impress a future possible employer (objectivity is therefore affected).
  • A former partner turned Finance Director has too much knowledge of the audit firm’s systems and procedures.

The extent of the threat to independence depends on various factors, such as the role the individual has taken up at the client, the extent of their influence on the audit previously, the length of time that has passed between the individual’s connection with the audit and the new role at the client.

Various safeguards might be considered:

  • Considering modifying the assurance plan
  • Ensuring the audit is assigned to someone of sufficient experience compared with the individual who has left
  • Involving an additional professional accountant not involved with the engagement to review the work done
  • Carrying out a quality control review of the engagement


In respect of audit clients, ethical guidance states that a partner should not accept a key management position at an audit client until at least two years have elapsed since the conclusion of the audit they were involved with. An individual who has moved from the firm to a client should not be entitled to any benefits or payments from the firm unless these are made in accordance with predetermined arrangements. A firm should have procedures setting out that an individual involved in serious employment negotiations with an audit client should notify the firm and that this person would then be removed from the engagement.

3.2.4 Partner on client board

A partner or employee of an audit/assurance firm should not serve on the board of an assurance client. It may be acceptable for a partner or an employee of an assurance firm to perform the role of company secretary for an assurance client, if the role is essentially administrative. (However, don’t forget the increased emphasis on the role of the company secretary in governance reports, aiming to enhance the secretary’s role to go beyond routine administrative tasks.)

                                 3.2.5 Family and personal relationships                              6/08, 6/10

Family or close personal relationships between assurance firm and client staff could seriously threaten independence. Each situation has to be evaluated individually. Factors to consider are:

  • The individual’s responsibilities on the assurance engagement
  • The closeness of the relationship
  • The role of the other party at the assurance client

When an immediate family member of a member of the assurance team is a director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the assurance engagement, the individual should be removed from the assurance team.

The audit firm should also consider whether there is any threat to independence if an employee who is not a member of the assurance team has a close family or personal relationship with a director, an officer or an employee of an assurance client.

A firm should have quality control policies and procedures under which staff should disclose if a close family member employed by the client is promoted within the client.

June 2010 Question 4 demonstrated how close personal relationships can make an ethical problem even more difficult.

Exam focus point

3.2.6 Gifts and hospitality

Unless the value of the gift/hospitality is clearly insignificant, a firm or a member of an assurance team should not accept it, as it clearly threatens objectivity. In addition, there may be an intimidation threat if there is a suggestion that the receipt of the gift will be made public.

3.2.7 Loans and guarantees

The advice on loans and guarantees falls into two categories.

  • The client is a bank or other similar institution
  • Other situations

If a lending institution client lends an immaterial amount to an audit firm or a member of the assurance team on normal commercial terms, there is no threat to independence. If the loan were material it would be necessary to apply safeguards to bring the risk to an acceptable level. A suitable safeguard is likely to be an independent review (by a partner from another office in the firm).

Loans to members of the assurance team from a bank or other lending institution client are likely to be material to the individual but, provided that they are on normal commercial terms, these do not constitute a threat to independence.

However, an audit firm or individual on the assurance engagement should not enter into any loan or guarantee arrangement with a client that is not a bank or similar institution.

3.2.8 Overdue fees

In a situation where there are overdue fees, the auditor runs the risk of, in effect, making a loan to a client, whereupon the guidance above becomes relevant.

Audit firms should guard against fees building up and being significant by discussing the issues with the audit committee or others involved in governance and, if necessary, the possibility of resigning if overdue fees are not paid.

3.2.9 Percentage or contingent fees
Contingent fees are fees calculated on a predetermined basis relating to the outcome or result of a transaction or the result of the work performed.

Key term

Ethical guidelines state that a firm should not enter into any fee arrangement for an assurance engagement under which the amount of the fee is contingent on the result of the assurance work or on items that are the subject matter of the assurance engagement. It would also usually be inappropriate to accept a contingent fee for non-assurance work from an assurance client.

3.2.10 High percentage of fees

A firm should be alert to the situation arising where the total fees generated by an assurance client represent a large proportion of a firm’s total fees. Factors such as the structure of the firm and the length of time it has been trading will be relevant in determining whether there is a threat to independence. It is also necessary to be aware of situations where the fees generated by an assurance client are a large proportion of the revenue of an individual partner.

Safeguards in these situations might include:

  • Discussing the issues with the audit committee
  • Taking steps to reduce the dependency on the client
  • Obtaining external/internal quality control reviews
  • Consulting a third party such as ACCA

Ethical guidance states that the public may perceive that a member’s objectivity is likely to be in jeopardy where the fees for audit and recurring work paid by one client or group of connected clients exceed 15% of the firm’s total fees. Where the entity is listed or public interest, this figure should be 10%.

It will be difficult for new firms establishing themselves to keep within these limits and firms in this situation should make use of the safeguards outlined.

3.2.11 Lowballing

When a firm quotes a significantly lower fee level for an assurance service than would have been charged by the predecessor firm, there is a significant self-interest threat. If the firm’s tender is successful, the firm must apply safeguards, such as:

  • Maintaining records such that the firm is able to demonstrate that appropriate staff and time are spent on the engagement
  • Complying with all applicable assurance standards, guidelines and quality control procedures
3.2.12 Recruitment

Recruiting senior management for an assurance client, particularly those able to affect the subject matter of an assurance engagement, creates a self-interest threat for the assurance firm.

Assurance providers must not make management decisions for the client. Their involvement could be limited to reviewing a shortlist of candidates, provided that the client has drawn up the criteria by which they are to be selected.

                                 3.3 Self-review threat                                                             6/08



The key area in which there is likely to be a self-review threat is where an assurance firm provides services other than assurance services to an assurance client (providing multiple services). There is a great deal of guidance in the ACCA and IESBA rules about various other services accountancy firms might provide to their clients, and these are dealt with below.

The distinction between listed companies, or public limited companies, and private companies is perceived to be an important issue in the question of providing other services to clients.

Key term                Public interest companies are those that for some reason (size, nature, product) are in the ‘public eye’. Auditors should treat these as if they are listed companies.

In the United States the Sarbanes-Oxley rules concerning auditor independence for listed companies state that an accountant is not independent if they provide certain non-audit services to an audit client. The relevant services are:

  • Bookkeeping
  • Financial information systems design and implementation
  • Appraisal or valuation services or fairness opinions
  • Actuarial services
  • Internal audit services
  • Management functions
  • Human resources
  • Broker-dealer services
  • Legal services

Exam focus        In exam questions, bear in mind the nature of the entity being audited. Is it a small owner-managed point      business where the auditor is in effect an all-round business adviser and accountant, or is it a listed company where the above rule is relevant?

3.3.1 Recent service with an assurance client

Ethical guidance focuses on individuals who have been a director or officer of the client, or an employee in a position to exert direct and significant influence over the subject matter information of the assurance engagement in the period under review or the previous two years to the assurance team.

If an individual had been closely involved with the client prior to the time limits set out above, the assurance firm should consider the threat to independence arising and apply appropriate safeguards, such as:

Obtaining a quality control review of the individual’s work on the assignment 

Discussing the issue with the audit committee

3.3.2 General services

For assurance clients, accountants are not allowed to:

  • Authorise, execute or consummate a transaction
  • Determine which recommendations should be implemented
  • Report in a management capacity to those charged with governance

Having custody of an assurance client’s assets, supervising client employees in the performance of their normal duties and preparing source documents on behalf of the client also pose significant self-review threats which should be addressed by safeguards. These could be:

  • Ensuring that non assurance team staff are used for these roles
  • Involving an independent professional accountant to advise
  • Putting in place quality control policies on what staff are and are not allowed to do for clients
  • Making appropriate disclosures to those charged with governance  Resigning from the assurance engagement
3.3.3 Preparing accounting records and financial statements

There is clearly a significant risk of a self-review threat if a firm prepares accounting records and financial statements and then audits them. On the other hand, auditors routinely assist management with the preparation of financial statements and give advice about accounting treatments and journal entries.

Therefore, assurance firms must analyse the risks arising and put safeguards in place to ensure that the risk is at an acceptable level. Safeguards include:

  • Using staff members other than assurance team members to carry out work
  • Obtaining client approval for work undertaken

The rules are more stringent when the client is listed or public interest. Firms should not prepare accounts or financial statements for listed or public interest clients unless an emergency arises.

For any client, assurance firms are also not allowed to:

  • Determine or change journal entries without client approval
  • Authorise or approve transactions  Prepare source documents
3.3.4 Valuation services
A valuation comprises the making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, a liability or for a business as a whole.

Key term

If an audit firm performs a valuation which will be included in financial statements audited by the firm, a self-review threat arises.

Audit firms should not carry out valuations on matters that will be material to the financial statements.

If the valuation is for an immaterial matter, the audit firm should apply safeguards to ensure that the risk is reduced to an acceptable level. Matters to consider when applying safeguards are the extent of the audit client’s knowledge of the relevant matters in making the valuation and the degree of judgement involved, how much use is made of established methodologies and the degree of uncertainty in the valuation. Safeguards include:

  • Second partner review
  • Confirming that the client understands the valuation and the assumptions used
  • Ensuring the client acknowledges responsibility for the valuation
  • Using separate personnel for the valuation and the audit


3.3.5 Taxation services

The provision of taxation services is generally not seen to impair independence.

3.3.6 Internal audit services

A firm may provide internal audit services to an audit client in most jurisdictions, but not in America under Sarbanes-Oxley. However, it should ensure that the client acknowledges its responsibility for establishing, maintaining and monitoring the system of internal controls. It may be appropriate to use safeguards, such as ensuring that an employee of the client is designated as responsible for internal audit activities and that the board or audit committee approve all the work that internal audit does.

3.3.7 Corporate finance

Certain aspects of corporate finance will create self-review threats that cannot be reduced to an acceptable level by safeguards. Therefore, assurance firms are not allowed to promote, deal in or underwrite an assurance client’s shares. They are also not allowed to commit an assurance client to the terms of a transaction or consummate a transaction on the client’s behalf.

Other corporate finance services, such as assisting a client in defining corporate strategies, assisting in identifying possible sources of capital and providing structuring advice, may be acceptable in jurisdictions other than the US provided that safeguards are in place, such as using different teams of staff and ensuring that no management decisions are taken on behalf of the client.

3.3.8 Other services

The audit firm might sell a variety of other services to audit clients, such as:

  • IT services
  • Temporary staff cover
  • Litigation support
  • Legal services

The assurance firm should consider whether there are any barriers to independence. Examples include the firm being asked to design internal control IT systems, which it would then review as part of its audit, or the firm being asked to provide an accountant to cover the chief accountant’s maternity leave. The firm should consider whether the threat to independence could be reduced by appropriate safeguards. Again the rules in America are stricter than elsewhere.

3.4 Advocacy threat

An advocacy threat arises in certain situations where the assurance firm is in a position of taking the client’s part in a dispute or somehow acting as their advocate. The most obvious instances of this would be when a firm offered legal services to a client and, say, defended them in a legal case or provided evidence on their behalf as an expert witness. An advocacy threat might also arise if the firm carried out corporate finance work for the client; for example, if the audit firm was involved in advice on debt reconstruction and negotiated with the bank on the client’s behalf.

As with the other threats above, the firm has to appraise the risk and apply safeguards as necessary. Relevant safeguards might be using different departments in the firm to carry out the work and making disclosures to the audit committee. Remember, the ultimate option is always to withdraw from an engagement if the risk to independence is too high.

                                 3.5 Familiarity threat                                                              6/08

A familiarity or association threat is where independence is jeopardised by the audit firm and its staff becoming overfamiliar with the client and its staff. There is a substantial risk of loss of professional scepticism in such circumstances.

We have already discussed some examples of when this risk arises, because very often a familiarity threat arises in conjunction with a self-interest threat.

Long association of senior personnel with assurance clients

3.6 Intimidation threat
Senior members of staff at an audit firm having a long association with a client is a significant threat to independence. All firms should therefore monitor the relationship between staff and established clients and use safeguards to independence, such as rotating senior staff off the assurance team, involving second partners to carry out reviews and obtaining independent (but internal) quality control reviews.

An intimidation threat arises when members of the assurance team have reason to be intimidated by client staff.

These are also examples of self-interest threats, largely because intimidation may only arise significantly when the assurance firm has something to lose.


                                 3.6.1 Actual and threatened litigation

The most obvious example of an intimidation threat is when the client threatens to sue, or indeed sues, the assurance firm for work that has been done previously. The firm is then faced with the risk of losing the client, bad publicity and the possibility that they will be found to have been negligent, which will lead to further problems. This could lead to the firm being under pressure to produce an unqualified audit report when they have been qualified in the past, for example.

Generally, assurance firms should seek to avoid such situations arising. If they do arise, factors to consider are:

  • The materiality of the litigation
  • The nature of the assurance engagement
  • Whether the litigation relates to a prior assurance engagement The following safeguards could be considered.
  • Disclosing to the audit committee the nature and extent of the litigation
  • Removing specific affected individuals from the engagement team
  • Involving an additional professional accountant on the team to review work

However, if the litigation is at all serious, it may be necessary to resign from the engagement, as the threat to independence is so great.

3.6.2 Second opinions

Another way that auditors can suffer an intimidation threat is when the audit client is unhappy with a proposed audit opinion, and seeks a second opinion from a different firm of auditors.

In such a circumstance, the second audit firm will not be able to give a formal audit opinion on the financial statements – only an appointed auditor can do that. However, the problem is that if a different firm of auditors indicates to someone else’s client that a different opinion might be acceptable, the appointed auditors may feel under pressure to change their opinion. In effect, a self-interest threat arises, as the existing auditor may feel that they will lose next year’s audit if they do not change this year’s opinion.

There is nothing to stop a company director talking to a second firm of auditors about treatments of matters in the financial statements. However, the firm being asked for a second opinion should be very careful, because it is very possible that the opinion they form could be incorrect anyway if the director has not given them all the relevant information. For that reason, firms giving a second opinion should ensure that they seek permission to communicate with the existing auditor and they are appraised of all the facts. If permission is not given, the second auditors should decline to comment on the audit opinion.

Given that second opinions can cause independence issues for the existing auditors, audit firms should generally take great care if asked to provide one anyway.

3.7 Conflicts of interest

Audit firms should take reasonable steps to identify circumstances that could pose a conflict of interest. This is because a conflict of interest could result in the ethical code being breached (for example, if it results in a self-interest threat arising).



IIn his blog, business ethics guru Chris MacDonald points out that there is nothing inherently unethical about being in a conflict of interest – it may well be something that happens through no fault of an individual’s, for example one client of a lawyer deciding to sue another. What is most often at stake in conflicts of interest is the integrity of the decision-making process. The approach to dealing with a conflict should be to recognise it, disclose it and take appropriate action (often to withdraw from involvement in the decision-making process).


3.7.1 Conflicts between members’ and clients’ interests

A conflict between members’ and clients’ interests might arise if members compete directly with a client, or have a joint venture or similar with a company that is in competition with the client.

The rules state that members and firms should not accept or continue engagements in which there are, or are likely to be, significant conflicts of interest between members, firms and clients.

3.7.2 Conflicts between the interests of different clients

Assurance firms can have clients who are in competition with each other. However, the firm should ensure that it is not the subject of a dispute between the clients. It must also manage its work so that the interests of one client do not adversely affect the other client. Where acceptance or continuance of an engagement would, even with safeguards, materially prejudice the interests of any client, the appointment should not be accepted or continued.

Auditors often give their clients business advice unrelated to audit. In such a position, they may well become involved when clients are involved in issues such as share issues and takeovers. Neither situation is inherently wrong for an auditor to be in. With regard to share issues, audit firms should not underwrite an issue of shares to the public of a client they audit. In a takeover situation, if the auditors are involved in the audits of both predator and target company, they must take care. They should not:

  • Be the principal advisers to either party
  • Issue reports assessing the accounts of either party other than their audit report

If they find that they possess material confidential information, they should contact the appropriate body or regulator.

3.7.3 Managing conflicts between clients’ interests

When considering whether to accept a client or when there is a change in a client’s circumstances, assurance firms should take reasonable steps to ascertain whether there is a conflict of interest or if there is likely to be one in the future. Relationships that ended two or more years earlier are unlikely to create a conflict. Disclosure is the most important safeguard in connection of conflicts between clients’ interests. Safeguards would usually include:

  • Notifying the client of the interest/activities that may cause a conflict of interest and obtaining their consent to act in the circumstances, or
  • Notifying all known relevant parties that the member is acting for two or more parties in respect of a matter where their respective interests are in conflict, and obtaining their consent so to act, or
  • Notifying the client that the member does not act exclusively for any one client in the provision of proposed services, and obtaining their consent so to act

Other safeguards

  • Using separate engagement teams
  • Procedures to prevent access of information (such as special passwords)
  • Clear guidelines for the respective teams on issues of security and confidentiality
  • The use of confidentiality agreements signed by the partners and staff
  • Regular review of the safeguards by an independent partner
  • Advising one or both of the clients to obtain additional independent advice
3.7.4 Individuals’ conflicts of interest

Individuals within a firm may also face their own conflicts of interest. These may include conflicts between loyalty and responsibilities to their bosses and to staff who work for them. There may also be conflicts between individuals’ desire to maintain or improve their own position in the firm and a wish to be certain that their ethical stance is correct, for example how far to follow up an audit query.


A December 2009 question covered a conflict that a junior partner had between their loyalty to a trainee who had raised well-founded concerns about a client and their loyalty to a senior partner who had dismissed the issue.

Exam focus point


In September 2011, the accountancy press reported that a draft European Union green paper would, if implemented, force accountancy firms to take very significant steps to deal with the problems of independence outlined in this section. The most radical proposal was that firms should be forced to specialise in either audit or non-audit services. The proposed rules would prohibit audit firms offering consultancy and advisory services even to non-audit clients. The list of consultancy and advisory services prohibited was similar to the list in the Sarbanes-Oxley legislation, but the draft went further than Sarbanes-Oxley in prohibiting the provision of these services to non-audit clients.

The draft also reportedly proposed mandatory rotation of audit firms to enhance professional scepticism and remove the pressure on partners not to lose longstanding clients. The report stressed a need to remove comfortable relationships between auditors and clients as a means of establishing market confidence.

Other suggestions included compulsory joint audits for public interest entities (double the scrutiny), audit quality reviews and expanded audit reports.

4 Problems facing accountants in business
The proposals were scaled back to some extent later in 2011, with the proposals for mandatory joint audits being dropped.

FAST FORWARD            The accountant in business may face a variety of difficulties, including conflicts between professional and employment obligations, pressure to prepare misleading information, and whether the accountant has sufficient expertise, financial interests or inducements.

4.1 Conflicts between professional and employment obligations

Ethical guidance stresses that a professional accountant should normally support the legitimate and ethical obligations established by the employer. However, they may be pressurised to act in ways that threaten compliance with the fundamental principles. These include:

  • Acting contrary to law, regulation, technical or professional standards
  • Aiding unethical or illegal earnings management strategies
  • Misleading auditors or regulators
  • Issuing or being associated with a report that misrepresents the facts

If the accountant faces these problems they should obtain advice from the employer, the ACCA or lawyers, or use the formal procedures within the organisation.

4.2 Preparation and reporting of information

As well as complying with financial reporting standards, the professional accountant in business should aim to prepare information that clearly describes the nature of the business transactions, classifies and records information in a timely and proper manner and represents the facts accurately. If the accountant faces pressure to produce misleading information, they should consult with superiors. The accountant should not be associated with misleading information, and may need to seek legal advice or report to the appropriate authorities.

4.3 Acting with sufficient expertise

Guidance stresses that the professional accountant should only undertake tasks for which they have sufficient specific training or experience. Certain pressures may threaten the ability of the professional accountant to perform duties with appropriate competence and due care.

  • Lack of time
  • Lack of information
  • Insufficient training, experience or education
  • Inadequate resources

Whether this is a significant threat will depend on the other people the accountant is working with, their seniority and the level of supervision over their work. If the problem is serious, the accountant should take steps to remedy the situation, including obtaining training, ensuring time is available and consulting. Refusal to perform duties is the last resort.

4.4 Financial interests

Ethical guidance highlights financial interests as a self-interest threat to objectivity and confidentiality. In particular the temptation to manipulate price-sensitive information in order to gain financially is stressed. Financial interests may include shares, profit-related bonuses or share options.

This threat can be countered by the individual consulting with superiors and disclosing all relevant information. Having a remuneration committee composed of independent non-executive directors determining the remuneration packages of executive directors can help resolve the problems at senior level.

                                 4.5 Inducements                                                                       6/11

Ethical guidance highlights the possibility that accountants may be offered inducements to influence actions or decisions, encourage illegal behaviour or obtain confidential information. We cover bribery and corruption in more detail below.

Exam focus        Remember that in the exam the accountants who appear in scenarios may not necessarily be working for point    accountancy firms. You may have to analyse the ethical dilemmas facing an accountant working in business.

5 Bribery and corruption

FAST FORWARD            The involvement of directors and others responsible for corporate governance in bribery and corruption can undermine the relationships of trust on which corporate governance is based.

5.1 Impact of bribery and corruption

Key terms              Bribery is the offering, giving, receiving or soliciting of any item of value to influence the actions of an official or other person in charge of a public or legal duty. (Black’s Law Dictionary).

Corruption can be defined as deviation from honest behaviour.

The purpose of bribery is to influence the conduct of the recipient. A bribe may not be money or a tangible gift. It can be granting a privilege to the recipient. A bribe need not be paid to be effective. Sometimes a promise or undertaking may be sufficient to influence decision-making and conduct. As well as the payer and the recipient of the bribe, others may be complicit if they know about the bribe and fail to report it, if they ignore signs that bribery is taking place or if they hold a position of responsibility and fail to take action to prevent bribery. Legislation such as the Bribery Act 2011 in the UK therefore makes commercial organisations liable if their employees pay bribes, unless they take adequate procedures to prevent bribery.


Bribery is an example of corruption. Other forms of corruption include the following.

  • Abuse of a system – using a system for improper purposes
  • Bid rigging – promising a contract in advance to one party, although other parties have been invited to bid for the contract
  • Cartel – a secret agreement by supposedly competing producers to fix prices, quantity or market share
  • Influence peddling – using personal influence in government or connections with persons in authority to obtain favours or preferential treatment for another, usually in return for payment
5.2 Why bribery and corruption are problems
5.2.1 Lack of honesty and good faith

Corruption means that someone in a position of authority or responsibility, including corporate governance responsibility, will no longer be acting impartially and in accordance with a position of trust. Bribery encourages others to violate a duty of service. It can also undermine behaviour in other ways. If staff are aware that bribery goes on within their organisation, even if they are not involved in it themselves, then this may undermine attempts by the organisation to impose standards of behaviour. It may also result in an overall lack of trust in what the organisation is doing.

5.2.2 Conflicts of interest

Those taking bribes will face a conflict between their legitimate duties and responsibilities (for example to shareholders), and any personal gains they may make through unethical activities. The personal gains may not be directly in the forms of money or gifts. Involvement by directors in bid rigging, for example, may generate higher profits for their company, which in turn may enhance their performance bonuses.

Further conflicts of interest may also arise if anyone who has participated in corruption is threatened with public exposure. The actions they take to ensure public exposure does not occur may also not be in the interests of their organisation, or those whose interests they should be representing.

5.2.3 International risk management

UK Government guidance on the 2011 UK Bribery Act acknowledges that commercial organisations in some parts of the world and in some sectors may come under pressure to pay ‘facilitation payments’ to foreign officials to promote their business ends. However, the number of places where businesses need to pay bribes to conduct business legitimately is debatable. If businesses had effective procedures for assessing and managing risks, then they should probably decide to avoid these places anyway.

5.2.4 Economic issues

Bribery and corruption results in a misallocation of resources. Contracts do not go to the most efficient producer but the producer that pays the highest bribes. Costs of doing business will increase. Bribery and corruption therefore threaten the basis on which markets are established and the operation of those markets. Participation in economic activity may be less likely if it is felt that bribery or market rigging make it unlikely that an acceptable return will be achieved for the risks taken. Alternatively, if one company is believed to be thriving by offering bribes, other companies may then follow its example and those being bribed may come to expect illicit payments as a matter of course.

5.2.5 Reputation

Those who do business with the organisation, for example suppliers or customers, may cease to do so if they have no confidence in its honesty. Honest staff may decide to leave if they feel that they cannot trust their employer.

We shall discuss professionalism and professional reputation in the next section. If accountants are found guilty of bribery, this can have an adverse impact not only on their employer but also on the reputation of the profession as a whole, giving the impression of dishonesty and lack of objectivity.



In April 2012 The New York Times published details of an alleged bribery scandal at retail giant Wal-Mart. The paper alleged that executives in Wal-Mart’s Mexican subsidiary had given payoffs to local officials in return for help getting permits to build new Wal-Mart stores in Mexico. Top executives in Mexico had known about these payments but had concealed them from Wal-Mart’s main board.

In 2005 the main board was tipped off by a former executive in Mexico. An internal investigation allegedly revealed $24 million in suspected bribery payments. However, the original investigation team was accused of being too aggressive and was dropped from the case. Responsibility for the investigation was transferred to one of the Mexican executives alleged to have authorised bribes. This executive exonerated their fellow executives and Wal-Mart’s main board accepted this. Although a report was made at the time to the US Justice Department, Wal-Mart played down the significance of the allegations. Executives in Mexico were not disciplined – one was promoted to vice chairman.

At the time of the investigation in 2005 Wal-Mart was facing pressure on its share price. The company’s

Mexican operations were its biggest success, highlighted to investors as a model of future growth. The New York Times said that there was evidence that main board directors were well aware of the devastating consequences the allegations could have if made public.

This was not the first time that there had been issues over corruption in Mexico. An investigation in 2003 revealed that Wal-Mart de Mexico had systematically increased sales by helping high-volume customers evade sales taxes. Executives had failed to enforce anti-corruption policies and ignored warnings from internal auditors. The company ultimately paid back taxes of $34.3 million.

Wal-Mart’s shares fell by nearly 9% in the days after The New York Times published its allegations.The fall at Wal-Mart also dragged down the whole Dow Jones Industrial Average. Wal-Mart faced the possibility of massive legal liabilities under the US’s Foreign Corrupt Practices Act. One of Wal-Mart’s institutional investors began action against executives and board members, and sought changes in the company’s corporate governance. A group of New York City pension funds said they would vote against re-electing five Wal-Mart directors. One of Wal-Mart’s managers started an online petition urging the company to undertake a thorough and independent investigation. The manager claimed that most of the signatories were current and former employees fed up with the philosophy of expansion at all costs.

Even only a few days after the story broke, there was evidence that Wal-Mart’s strategic ambitions may have been damaged by scandals. Its attempts to open stores in new areas and other dealings appeared to be coming under increased scrutiny. It had recently been focusing on bigger cities where there was more bureaucracy to overcome than in suburban and rural areas. The bribery scandal appeared to have made it more difficult for Wal-Mart to proceed with its expansion plans.


5.3 Measures to combat bribery and corruption

Many of the measures we have already discussed will be relevant to combating bribery.

Recent legislation in certain countries has put pressure on businesses to introduce sufficient controls. As mentioned above, under the UK Bribery Act, for example, if an employee or associate of a commercial organisation bribes another person, the organisation will be liable if it cannot show that it had adequate procedures in place to prevent bribes being paid. Under previous legislation, a company was only likely to be guilty if senior management was involved. Now, however, it must demonstrate that its anti-corruption procedures are sufficient to stop any employees, agents or other third parties acting on the company’s behalf from committing bribery.




Guidance published in 2011 by the UK Ministry of Justice on the Bribery Act suggests that what is seen as adequate will depend on the bribery risks faced by the organisation, and the nature, size and complexity of the business. The UK guidance is based on six principles:

  • Proportionate procedures. Measures taken should be proportional to risks and nature, size and complexity.
  • Top-level commitment. Top-level management should be committed to preventing bribery and promoting a culture where bribery is viewed as unacceptable.  
  • Risk assessment. Organisations should assess the nature and extent of their exposure to bribery internally and externally. Some activities, for example extraction, and some markets, for example countries where there is no anti-bribery legislation, may be at higher risk.
  • Due diligence. The organisation should carry out due diligence procedures in relation to those who perform services for it, or on its behalf.
  • Communication. Bribery prevention policies and procedures should be embedded and understood throughout the organisation through communication and training.
  • Monitoring and review. The organisation should monitor and review anti-bribery procedures and improve them as required. The guidance emphasises that risks are dynamic, and procedures may need to change if risks alter.


5.3.1 Establishing culture

The UK guidance highlights the need for board commitment to fight corruption. Directors may seek to establish a commitment against corruption by a formal statement, setting out a zero tolerance policy and spelling out the consequences for employees or managers who transgress. The statement should include an assertion of the benefits of avoidance of corrupt activity (for example maintaining reputation, and customer and business partner confidence). The commitment of the management team should be reinforced by the involvement of senior management in the development and implementation of bribery prevention procedures.

As with other areas, communication of the organisation’s procedures and policies, and training in their application, will be very important in helping to establish the culture. Training should include general training on the threat of bribery on induction, and also specific training for those involved in higher risk activities such as purchasing and contracting.

However, while establishing the right culture is an important part of taking effective action to combat corruption, a culture that is ambiguous or not enforced may adversely affect the success of other measures. This may occur if managers and staff feel that they are receiving mixed messages. They may believe that they are expected to do what it takes to earn sufficient returns in environments where ethical temptations exist, or that ethically dubious conduct will be ignored or implicitly accepted.

5.3.2 Code of conduct

A code of conduct is perhaps the most important element of communication that the UK guidelines stress. As well being central to communication with employees, a publicly communicated code also reassures those doing business with the organisation and can act as a deterrent to misconduct.

We have already seen in this chapter the example code of conduct that includes provisions about dealing truthfully with suppliers and refraining from seeking or participating in questionable behaviour to secure competitive advantage. Businesses may decide to issue a separate anti-bribery code. However, there may also be the same issues with an anti-bribery code as a general ethical code, that for example staff do not feel it is relevant to them. This reinforces the need for effective training of staff.

5.3.3 Risk assessment

Identification of circumstances where bribery may be a problem must be built into business risk assessments. Sensitive areas could include the activities of intermediaries or agents or staff within the organisation responsible for hospitality or promotional expenditure. Note that the UK guidance stresses that risks may change over time (for example as the business enters new markets) and so may need to be reassessed. A poor internal control environment may also be a factor that contributes significantly to increased risk.



The guidance published in 2011 by the UK Ministry of Justice highlighted five areas where the risk of bribery and corruption may be high.

  • Countries with high levels of corruption, that lack anti-bribery legislation and which fail to promote transparent procurement and investment policies are at high risk.
  • Higher-risk sectors include the extractive and large-scale infrastructure sectors.
  • Risky transactions include charitable and political contributions, licences and permits, and transactions relating to public procurement.
  • Business opportunity. Potentially risky projects include high-value projects, projects involving many contractors or intermediaries, and projects not apparently undertaken at market price or which lack a clear business objective.
  • Business partnership risk. Risky situations could include the use of intermediaries in transactions with foreign public officials, involvement with consortia or joint venture partners and relationships with politically exposed persons.

The guidance also highlights various internal failings that could add to risk.

  • Deficiencies in employee training, skills and knowledge
  • Bonus culture that rewards excessive risk taking
  • Lack of clarity in the organisation’s policies on, and procedures for, hospitality and promotional expenditure and political or charitable contributions
  • Lack of clear financial controls
  • Lack of clear anti-bribery message from top-level management


5.3.4 Conduct of business

As the UK guidance states, a strong tone at the top and the ethical code may be undermined by a lack of detailed guidance on the implementation of anti-bribery procedures.

Areas where detailed guidance may be required include the extent of due diligence procedures on potential business partners or intermediaries – highlighted as a key area in the UK guidance above. The guidance points out that due diligence is both risk assessment and a means of mitigating risks.

Due diligence procedures may be carried out at different levels. They may be at a low level, for example, when contracting for the provision of information services, but at a higher level when a business is obliged to use a local agent in another country or is selecting an intermediary when establishing business abroad. Procedures may include questioning, investigations or general investigation. Appraisal and monitoring should continue once the relationship has been established.

Other important areas will include:

  • The need for contractual terms with consultants and intermediaries to reflect internal rules and to emphasise zero tolerance of bribery


  • Policies on hospitality and promotional expenditure and charitable and political donations
  • Procurement and tendering guidelines
  • Differentiation between properly payable fees (for example inspection certificates) and facilitation payments (often bribes)
  • Recruitment and human resource procedures to mitigate the risks of employees in businesssensitive areas becoming involved in bribery

However detailed the procedures, they will not be able to give absolute assurance that corrupt activities will not take place. Staff may misinterpret the requirements, or may encounter ethically dubious situations not covered by the guidance. They may assume that conduct not forbidden by the guidance is legitimate.

There is also the issue that detailed guidance is meant to ensure compliance with the law. In many countries the law is not entirely clear. The US Chamber of Commerce, for example, has criticised American law for prohibiting bribery in some circumstances but not others, although critics have claimed that the evidence supporting this claim is thin.

5.3.5 Reporting of transactions and whistleblowing

Ethical guidance points out that threats to compliance may appear to arise not only from the accountant making or accepting the inducement but also from the offer having been made in the first place. It recommends that directors or senior managers be informed, and disclosure may have to be made to third parties. An organisation’s guidance should make it clear that managers and staff should seek guidance about, and disclose, any activities that are questionable. Guidance on whistleblowing procedures should also make clear that they extend to reporting suspicions of bribery and corruption. Staff should have the opportunity to make suggestions for improvement of bribery prevention procedures.

5.3.6 Monitoring

As part of their regular monitoring of risk management, the board should receive reports on compliance with internal procedures, such as due diligence on agents and details about questionable behaviour that has been discovered. The UK guidance makes it clear that monitoring the systems designed to prevent bribery is an important element of the board’s overall monitoring of internal control systems and consideration of whether systems need to be improved as the risk environment changes. Events that may result in changes to systems include changes of government, reports of bribery or other negative press coverage.



A survey by consulting firm Proviti and the law firm Covington & Burling identified five common control weaknesses in firms that had faced legal action under the US Foreign Corrupt Practices Act (FCPA).

  1. Inadequate contract pricing review

Controls could not determine whether contract prices were inflated to conceal kickbacks. They could not identify when illicit commissions were disguised as legitimate business expenses and unwarranted additional fees were added to contract prices. Firms needed to introduce competitive bidding and insist on invoices showing sufficient detail.

  1. Inadequate due diligence and verification of foreign business representatives

Failings included inadequate risk assessments, a lack of written contracts containing FCPA compliance terms and using representatives with a previous history of dubious payments.

  1. Ineffective accounts-payable payments and review

Weaknesses included making inappropriate payments that were disguised as legal fees, lack of back-up for payments and paying for services that were not included in contracts.

  1. Ineffective financial account reconciliation and review

Documentation failed to describe transactions so that reviewers could identify problems. Issues included inflated revenues, recording of entries that were false or placed in the wrong account and payment of false invoices.

  1. Ineffective commission payment review and authority

Commissions were not verified and as a result bribery payments to foreign government officials were not identified. Commissions were also paid for duties that were not assigned by the contract, misleading information was presented to internal auditors and commission payments were inflated to include bribes. There needed to be careful review of commissions, including reviewing contracts to see if agents were entitled to a commission and the amount of the commission, and determining whether the work met the contract. Payments should be made to the contract counter-party and not a third party. Checks should be carried out to make sure that the payments were not made to an offshore account.


Sections on bribery and corruption were introduced into the P1 study guide for the June 2012 exams. The subject is topical with the introduction of strengthened anti-bribery legislation in many countries and thus you should expect to see scenarios where corruption is a major issue.

Exam focus point

6 The accountancy profession and the public interest


Professionalism means avoiding actions that bring discredit on the accountancy profession.

Acting in the public interest means acting for the welfare of society at large.

Various commentators have argued that the figures accountants produce are not neutral, but incorporate value judgements and are in accordance with the wishes of certain viewpoints in society.

                                 6.1 Professions and professionalism                                 6/10
6.1.1 Profession

The theory and skills are acquired by a structured training process, validated by examination and maintained through continuing professional education.

Values underpin the professional’s actions. For example, the medical profession is underpinned by the principle of the sanctity of life. The common code of values and conduct should be independently administered by a governing body.

The skills and values enhance the weight of a professional’s judgement. They are what the professional holds themselves out to have by virtue of calling themselves an accountant (for example) and belonging to a professional institute.

In return for accepting a duty to society, members of a profession are allowed privileges, for example being able to practise certain activities or to use a title.

Key term                A profession is based on a body of theory and skills, adherence to a common code of values and conduct, and acceptance of a duty to society as a whole.


6.1.2 Professionalism and professional behaviour

IESBA’s code of ethics defines professionalism in terms of professional behaviour. Professional behaviour imposes an obligation on professional accountants to act in the public interest. They should comply with relevant laws and regulations and avoid any action that may bring discredit to the


profession. Professional behaviour is one of the fundamental principles that we discussed earlier this chapter, and professional behaviour in a wider sense would include compliance with the other four ethical principles.

Professionalism can also be seen as a state of mind, a concern to take action in the public interest and sometimes to lead public opinion, for example in developing guidance on reporting.

In marketing themselves and their work, professional accountants should not bring the profession into disrepute. They should avoid making exaggerated claims for their own services, qualifications and experience and should not refer to others disparagingly. Accountants may also have other professional responsibilities depending on the roles they hold, for example responsibilities as company directors.

An ACCA survey in 2005 produced a wider definition of professionalism. The survey suggested that the most important competencies for modern professionals were:

  • Maintaining confidentiality and upholding ethical standards
  • Preparing financial information
  • Complying with legal and regulatory requirements
  • Interpreting financial statements
  • Communicating effectively
  • Preparing financial statements
  • Problem solving and managerial skills

Professionalism is also important when dealing with professional colleagues, particularly if the individual is a senior member of the organisation. As leaders, senior accountants should aim to work well with other team members, and deal appropriately with concerns they raise about the work they are doing. They should also look to set an example to junior staff.

                                 6.2 The public interest                                                6/09, 6/14

Key term The public interest is considered to be the collective wellbeing of the community of people and

institutions the professional accountant serves, including clients, lenders, governments, employers, employees, investors, the business and financial community and others who rely on the work of professional accountants. (IESBA)

IESBA comments that an accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. It extends to society, and often consists of supplying information that society needs.

One fundamental problem with the debate about accountants acting in the public interest is the lack in most jurisdictions of a robust definition of what the public interest is that is backed by enforcement mechanisms. Within UK law for example there is no statutory definition of the public interest. As one critic, Lovell, comments: ‘Its malleability possibly explains both its longevity and its unreliability in a court of law.’

Critics of the view that accountants act in the public interest have focused on the alleged closeness between accountants’ definition of the public interest and the profession’s own self-interest. Critics have claimed that accountants’ insistence on self-regulation indicates where their priorities lie. Some believe that the accountancy profession has always been vulnerable to this charge. Lee’s history of the accountancy profession in the 19th century comments: ‘The most obvious feature of early UK professionalisation is the pursuit by accountants and their institutions of economic self-interest in the name of a public interest’.

Exam focus point Question 2 in June 2009 asked about accountants’ relationship with the public interest.

6.3 Influence of the accountancy profession on organisations

That the influence of the accountancy profession is potentially huge can be established simply by considering all the different involvements that accountants have.

  • Financial accounting
  • Audit
  • Management accounting
  • Consulting
  • Tax
  • Public sector accounting

Accountants’ advice will also be crucial in situations of change, where accountants are advising on the financial and information systems aspects of new developments.



Accountants dominate senior business positions in many countries. The variety of involvements that accountants have within each area of their expertise is also very large. The Institute of Chartered Accountants in England and Wales’ recruitment literature highlights for example the role of tax accountants.

‘Some professionals will advise on policy for our tax system, others will write the tax law. Someone else will administer the collection of taxes for the Government. Others will act for businesses of all types who have to pay these taxes. Marketing, IT, media and publishing all need tax specialists.’


Accountants therefore have a significant impact, a significant footprint, on the organisations for which they work. Is this always for the best?



In the book Ethical Issues in Accounting a chapter by Alan Lovell points out that accountants will be responsible for managing public sector organisations in as cost effective a way as possible, which may not necessarily be compatible with the service objectives of those organisations nor the codes of other professional staff who work within those organisations.

Lovell utilises Kohlberg’s view of ethical hierarchy to explain how accountants effectively view other professionals. The accounting system in effect assumes that, as the other professionals do not trust the system or those who operate it, this illustrates that they have a low level of moral reasoning and therefore justifies a strict performance management system, together with anti-whistleblowing codes designed to deter employees from revealing shortcomings in patient care.

However, the ethical codes to which doctors and nurses adhere are founded on the idea that they are their patients’ advocates and this implies that they need to use a much higher level of moral reasoning.


6.4 The accountancy profession in society

At one level the numbers included within accounts can have a number of impacts.

  • Mechanistic issues are where the accounts are used to judge the performance of a company or its directors in line with a regulation or contract. Examples are company borrowing limits which are frequently defined as a multiple of share capital and reserves and directors’ bonus schemes that are based on some proportion of reported profits.
  • Judgemental issues are where the figures in the accounts influence the judgement of their users. The accounts may influence not just the view of investors, but governments seeking to assess what a reasonable tax burden would be and employees determining their wage claims.
6.5 Accountancy as a value-laden profession

Critics of the accountancy profession claim that the work done and the conclusions drawn by accountants are determined by a set of beliefs and values that imply a particular view of how power and wealth should be distributed in society. Accountants, it is claimed, believe that precedence should be given to the interests of suppliers of financial capital.

Many accountants would argue in response that the numbers in accounts support no cause and it is for others to draw conclusions on the figures produced. If pressed they might argue that they are following the requirements of laws or of their clients. However, the laws may be ethically suspect and the following the requirements of clients argument does not support ideas of accountants’ independence or, worse, leads to the suspicion that accountants are pursuing ethically dubious courses.

Even if the ends are not explicitly ethically suspect, much accounting literature does assume that accountants are producing information for individuals or corporations seeking to maximise their personal wealth. If this has a moral justification, it is based on the ideas of liberal economic democracy. These ideas are that individuals should be free to exercise their economic choices and are equally able to do so. No group in society dominates either economically or politically. The result of the individual pursuit of economic benefit is economic efficiency, maximum profits and economic growth, and everyone within society being better off.

6.5.1 Criticisms of liberal economic democracy

Critics have claimed that the model of liberal economic democracy is far from reality and has various flaws. By providing the information that supports the present systems, accountants are complicit in perpetuating its flaws.

  • Lack of equality

One significant criticism is that individuals are not equal economically and are evidently not able to make economic choices that will benefit themselves. The argument that people make a rational economic choice to be homeless is clearly wrong. Accountants are therefore accused of supporting those who can make economic choices and by doing so perpetuate social inequality, ensure that wealth continues to be distributed among the already wealthy, and suppress minorities and the disenfranchised and powerless.

  • Role of institutions

A related criticism is that individuals do not exercise the real power but institutions – principally the Government and corporations. Indeed, critics point to many instances of governments acting to protect the interests of shareholders and the information rights of the financial community against less well-off groups in society.

Marxist arguments take this viewpoint to its furthest conclusion, arguing that power is held by capital, that capital and labour are inevitably in conflict and that the state acts to protect capital and suppress labour. Accountants too are complicit in this.

  • Failure to increase social welfare

The argument that the pursuit of individual self-interest leads to maximum social welfare appears tenuous. Even if wealth is maximised, there is no guarantee that all aspects of social welfare will be maximised. Indeed, some aspects of social welfare, such as quality of life or health, would not seem to have an obvious link with maximising income. In addition, maximisation of wealth does not imply that wealth will be fairly distributed. Critics have claimed that economic growth has been at the expense of a widening gap between rich and poor, both within developed countries and between developed and developing countries.

  • Environmental problems

Critics such as the ‘deep ecologists’ (discussed in Chapter 11) have claimed that the pursuit of growth has been at the expense of environmental degradation and that society needs to change its priorities. By aiding the promotion of economic growth, accountants are complicit in supporting activity that harms the environment.

  • Ethical viewpoint

Some critics have gone back to ethical theories outlined earlier and have claimed that accountants are complicit in a version of utilitarianism with the economic ends justifying the means rather than another (preferable) ethical position.

The examiner has stressed that students must be able to discuss whether accountants’ role is that of the servant of capital.

Exam focus point

6.6 Criticisms of the accountancy profession

Inevitably perhaps it has been the critics of the accountancy profession who have been most vocal in highlighting the influence of accounting in resource allocation, seeking to demonstrate its complicity in wealth distribution and its role as the agent of capital.

6.6.1 Accountants in management accounting

In his book The Social and Organisational Context of Management Accounting Puxty argued that the ‘received wisdom’ of management accounting cannot legitimately be taken for granted.



Puxty highlighted behavioural studies of budgeting that use the phrase ‘dysfunctional behaviour’, meaning behaviour that is harmful to the organisation. But why should this be so? Is it not ‘dysfunctional’ from the point of view of the manager that they are expected to suffer the misery of having their actions constrained by budget targets? There are many other examples: what, for instance, is ‘favourable’ about a favourable labour rate variance, from the point of view of the workforce?

Puxty went on to show that traditional management accounting is rooted in modes of thought that are only considered to be ‘common sense’ for the time being. ‘Common sense’ he asserted, is determined by the beliefs and values of the society in which it supposedly applies. It is not common to all eras (it is relativist).

In particular, the ideas that considerations of society (of which businesses are a part and a microcosm) should take the individual as their starting point and that individuals have rights to liberty and property are fundamental to accounting, yet they only originated with philosophers like Hobbes and Locke in the 17th century.


Puxty also argues that Foucault’s ideas about the way in which regimes of power have grown and been sustained through disciplinary mechanisms and the institution of norms for human behaviour are very relevant to the role of the accountancy profession.



Other studies along similar lines to Puxty have attempted to show how the origins of accounting reside in the exercise of social power and how accounting is ‘implicated in the creation of structures of surveillance and power that permit modern management to function at a distance from the work process itself.’


One study considers the development of standard costing and budgeting in the 1920s as simply one part of a general widening of the apparatus of power at this time.

‘The practices that developed were intended to make the person … more amenable to being managed and controlled’.

This should be seen in the context of other drives current at the time, such as the wide advocacy of eugenics (the sterilisation of the ‘unfit’ to improve the country’s breeding stock) and an interest in ‘mental hygiene’ to be promoted by means of such methods as IQ testing.

Macintosh in Management Accounting and Control Systems (1994) looks at Foucault’s ideas about the general principles of discipline and control that became widespread in the Western world from about 1700 onwards.

  • The enclosure principle, in essence keeping people in confined spaces (at the desk, at their workstation)
  • The efficient body principle, which disciplines individuals’ time when they are in their confined spaces
  • The correct comportment principle, disciplining behaviour through surveillance, through the imposition of norms of behaviour, and through examination

Macintosh has little difficulty in drawing parallels with management accounting – responsibility accounting, standard costing practices and performance measurement systems among the examples chosen.


6.6.2 Accountants and financial accounting

Unsurprisingly accountants have been criticised in similar terms for the picture published financial accounts give and the support they provide to capital markets. Prem Sikka argues that many accountants:

‘… believe that mobilising accounting and auditing practices in support of markets and financial      capital (held by shareholders) is ethically acceptable but mobilising accounting to give visibility to  poverty and institutionalised exploitation is somehow unethical … Accounting and auditing practices              remain preoccupied with prioritising capital over labour (in the statement of profit or loss) and the                property rights (in the statement of financial position). Most accounting books have little to say                 about social justice or the rights of employees.’

For example, Professor Sikka and others proposed expanding the level of disclosures in accounts in the early 1990s to include disclosures of low pay. This proposal was made at a time when the Labour party was pressing for the introduction of the minimum wage.

Sikka and others have emphasised the idea that accountancy decisions inevitably have political consequences and that it is difficult to see how accountants could hold positions that are not influenced by wider values. However, one criticism of their view is that accountants are not free to determine their own stance, and that instead they are constrained by politicians’ attitudes expressed in legislation.

6.6.3 Accountants and taxation advice

Prem Sikka and others have also criticised accountants for being complicit in their clients’ paying less than their ‘fair’ share of tax. In some cases accountants have been found guilty of helping clients evade tax and duly punished. However some critics seem to suggest that accountants should not be involved in helping their clients legally avoid tax. Again, however, the question arises as to whether accountants should base their advice on the law, or on some sort of notion as to what a fair tax liability is.

6.7 Acting against the public interest

Criticism of the accountancy profession has extended to the rules that it follows. Critics have argued that the rules:

  • Are too passive, allowing too great a variety of accounting treatments, and failing to impose meaningful responsibilities on auditors such as an explicit responsibility to detect and report fraud
  • Emphasise the wrong principles, giving priority to client confidentiality over disclosure in the wider public interest, and teaching accountants to follow rules rather than question them
  • Allow auditors to establish a long-term, cosy relationship with clients by the failure to require compulsory rotation of auditors and allowing auditors to provide non-audit services, rather than forcing auditors to maintain a distance
  • Allow the creation of too small a number of large firms who dominate the audit of major listed companies and therefore can effectively set the agenda as regards scope of audit work (although arguably it is only large firms that can audit the very biggest companies)

Arguably these views depend to some extent on hindsight, the implication being that, as auditors and governance structures have failed to identify corporate malpractice, there must be something wrong with the rulebook that is being followed.

However, we’ve seen how the fallout from the Enron case influenced the development of the stricter

Sarbanes-Oxley rules in the United States. Partly this was due to Enron appearing in a number of ways to ‘tick the right boxes’. It had a good number of non-executive directors on its board with a strong range of experience, for example.

The examiner has emphasised that students will need to show that they can act as the moral conscience of the organisation. They see the granting of professional status to accountants and other experts as a privilege, given on the understanding that it is used in the interests of society and clients.
Exam focus point



Think about all the major activities that you are involved in if you work as an accountant. Who are the stakeholders involved? Who do you treat as the most important stakeholders? And why?



Answers will vary depending on your responsibilities. If for example you’re involved in audit and answered the clients because they pay our bills, who do you mean when you say the client – the directors or shareholders? If you work in tax planning, by reducing your client’s tax bill, are you contributing to society as a whole losing out through diminished tax revenues?



Chapter Roundup

Organisations have responded to pressures to be seen to act ethically by publishing ethical codes, setting out their values and responsibilities towards stakeholders.
Professional codes of ethics apply to the individual behaviour of professionals and are often based on principles, supplemented by guidance on threats and safeguards.


Threats to independence of accountants in practice include self-interest, self-review, advocacy, familiarity and intimidation.

Accountants in practice may face conflicts of interest between their own and clients’ interests, or between the interests of different clients.

The accountant in business may face a variety of difficulties, including conflicts between professional and employment obligations, pressure to prepare misleading information and whether the accountant has sufficient expertise, financial interests or inducements.
The involvement of directors and others responsible for corporate governance in bribery and corruption can undermine the relationships of trust on which corporate governance is based.


Professionalism means avoiding actions that bring discredit on the accountancy profession.

Acting in the public interest means acting for the welfare of society at large.

Various commentators have argued that the figures accountants produce are not neutral but incorporate value judgements and are in accordance with the wishes of certain viewpoints in society.

Quick Quiz

  • What does an organisation’s ethical code usually contain?
  • What are the key elements of IESBA’s Code of Ethics?
  • Which of the following is not an advantage of a principles-based ethical code?
    • It prevents narrow, legalistic interpretations.
    • It can accommodate a rapidly changing environment.
    • The illustrative examples provided can be followed in all similar situations. D             It prescribes minimum expected standards of behaviour.
  • Fill in the blank:

…………………………………. means that members should be straightforward and honest in all business and professional relationships.

  • According to the IESBA Code of Ethics, what should professional accountants consider when attempting to resolve ethical issues?
  • Give four examples of a familiarity threat.
  • A firm that is sued by a client must resign from engagement with that client.



  • Fill in the blank:

……………………………….. is the collective wellbeing of the community of people and interests that the accountant serves.

Answers to Quick Quiz

  • A statement of the organisation’s values and an explanation of its responsibilities towards its stakeholders
  •  An acceptance by the accountancy profession of the responsibility to act in the public interest
    • Fundamental principles of ethics
    • Conceptual framework, requiring accountants to address threats to compliance and apply safeguards
  • C Although the examples may be good guides for conduct in many instances, circumstances will vary, so they should not be seen as totally prescriptive.
  • Integrity
  •  The facts
    • The ethical issues involved
    • Related fundamental principles
    • Established internal procedures
    • Alternative courses of action, considering the consequences of each
  •  Family and personal relationships between the client and the firm
    • Long association with assurance client
    • Employment with assurance client
    • Recent service with assurance client
  • Not necessarily. Other safeguards can be used (disclosure to the audit committee, removing certain individuals from the team, involving an additional professional accountant on the team to review work). However, resignation may be required in the end.
  • The public interest



Number Level Marks Time
Q10 Examination 20 39 mins

11 Corporate social responsibility

In this last chapter we focus on the ethical and corporate social responsibilities
organisations have. These can be seen as following on from the ideas in the last
section of
Chapter 10. The idea is that the public interest means businesses should
follow stricter ethical practices than legislation, regulations or governance codes
require. In Section 1 we pick up on the social responsibility ideas that we
discussed first in
Chapter 2 and focus on the specific concept of corporate
citizenship. In Section 2 we look at how ideas of ethics and social responsibility
are combined. The Gray, Owen and Adams viewpoints have been highlighted by
the examiner as particularly important, and tie in with the issue of which
stakeholders are important to the organisation.
In Sections 3 to 6 we examine the impact organisations have on the environment.
The concept of sustainability, discussed in Section 4, is particularly important, as it
relates to whether the impact the organisation makes on the environment can be
limited to what the environment can bear. We also consider aspects of reporting,
managing and auditing the environmental effects of organisations’ activities,
including integrated reporting.

Study guide

    Intellectual level
A7 Corporate governance and corporate social responsibility  
(d) Explain the concept of the organisation as a corporate citizen of society with rights and responsibilities. 3
E2 Different approaches to ethics and social responsibility  
(a) Describe and evaluate the Gray, Owen and Adams seven positions on social responsibility. 2
(b) Describe and evaluate other constructions of the corporate and personal ethical stance. 2
(c) Describe and analyse the variables determining the cultural context of ethics and corporate social responsibility. 2
(d) Explain and evaluate the concepts of ‘CSR strategy’ and ‘strategic CSR’. 2
E7 Integrated reporting and sustainability issues in the conduct of business  
(a) Explain and assess the concept of integrated reporting and evaluate the issues concerning accounting for sustainability, including the alternative definitions of capital. 3
(b) Describe and assess the social and environmental impacts that economic activity can have (in terms of social and environmental footprints and environmental reporting). 3
(c) Describe the main features of internal management systems for underpinning environmental and sustainability accounting such as EMAS and ISO 14000. 1
(d) Explain and assess the typical content elements and guiding principles of an integrated report, and discuss the usefulness of this information to stakeholders. 3
(e) Explain the nature of social and environmental audit and evaluate the contribution it can make to the assurance of integrated reports. 3

Exam guide

You may see a whole optional question on the issues covered in this chapter as it covers various aspects of organisations’ activities and control systems. Alternatively, as in Pilot Paper Question 1, some of the themes may be brought in as part of a wider question.

1 Corporate citizenship


Corporate citizenship has been used to describe how an organisation’s values are shaped and the impact concepts of responsibility have on business decision-making.

1.1 Corporate social responsibility

We examined the concept of corporate social responsibility (CSR) in Chapter 2, mainly in the context of corporate governance. Remember the four levels of corporate social responsibility identified by Carroll:

Economic  To shareholders wanting dividends/capital gains, to employees wanting fair employment, to customers wanting good quality products
Legal Obeying the law is a requirement in all societies, though legal compliance imposes greater burdens in some societies rather than others
Ethical  Acting in a fair and just way
Philanthropic  Voluntary contributions to society

Carroll’s viewpoint can be matched with the various stages of a business’s development. At the start it is concerned with economic survival. As it grows larger, other issues become important and society’s expectations of it become greater.

In recent years corporations have recognised more and more the importance of CSR and have developed strategies to demonstrate its implementation. Such strategies are commonly defined under the following headings.


A focus on sustainability, for example by using renewable energy sources, recycling, using green technology, minimising waste and pollution


Engagement with local communities, for example by supporting local charities and social events, employing local people, investing in the local economy


Adopting ethical business practices, for example by paying living wages, avoiding the exploitation of child labour, respecting health and safety, eliminating fraud and corruption

Some commentators have criticised the CSR approach, claiming that large corporations engage in this exercise for cynical or insincere motives; in other words, they are employing ‘strategic CSR’ in order to enhance their image and their brand value. Indeed some business activities are considered beyond the reach of CSR altogether, for example arms manufacturers and tobacco firms. Others, notably Milton Freidman, argue that corporations have no responsibility to society, only to their shareholders, and that their sole purpose is to make profits on behalf of those shareholders.



Even businesses acting philanthropically may receive criticism from stakeholders if for example their customers disagree with the causes they are supporting. TOMS shoes faced criticism from its more socially progressive customers when it became linked to the right-wing group Focus on the Family.

As ethics writer Chris MacDonald pointed out, people who wished corporations to adopt social causes should perhaps be careful what they wished for. There was no guarantee companies would not give to causes that some of their customers found to be abhorrent.

Chris MacDonald highlighted a case of a reverse situation – a charity having problems with a corporate donor with a poor reputation. The St Patrick Center, a Catholic charity providing assistance to homeless people, cancelled a fundraising dinner at a Hooters restaurant after complaints that the collaboration was contrary to the Christian faith. Hooters’ restaurants employ waitresses wearing provocative clothing and have attracted accusations that they exploit women.

Macdonald points out that charities have to draw a line somewhere, as their ability to raise funds depends on their reputation and the goodwill of donors. Whether drawing of the line is a matter of ethics or prudence is arguable, however. Many large corporate donors have ethical questions over some of their activities, but can charities refuse all their donations?



                                  1.2 Corporate citizenship                                                    12/11
Corporate citizenship is the business strategy that shapes the values underpinning a company’s mission and the choices made each day by its executives, managers and employees as they engage with society. Three core principles define the essence of corporate citizenship, and every company should apply them in a manner appropriate to its distinct needs: minimizing harm, maximizing benefit, and being accountable and responsive to stakeholders. (Boston Center for Corporate Citizenship)
Key term

Much of the debate in recent years about corporate social responsibility has been framed in terms of corporate citizenship, partly because of unease about using words like ethics and responsibility in the context of business decisions. Discussion of corporate citizenship also often has political undertones, with corporations acting instead of governments that cannot – or will not – act to deal effectively with problems. Commentators have also pointed to liberalisation, deregulation and privatisation placing more power in the hands of corporations and less in the hands of the state.

The general concepts of rights and responsibilities are fundamental to the debate on citizenship.

1.2.1 Rights

The rights that a corporate citizen has include being able to take actions that are lawful and to enjoy the protection of the law. The rights of a company include the right to exist as a separate legal entity and carry on a lawful business. Society will grant it protection under the law and will also permit it to develop and expand.

1.2.2 Responsibilities

Responsibilities are the duties owed to society by the citizen as a consequence of the citizen belonging to the society and enjoying rights within it. In order to enjoy the protection, the individual or organisation has to comply with the laws that affect it and act in accordance with society’s behavioural norms.

1.3 Perspectives on corporate citizenship

Matten et al have suggested that there are three perspectives or corporate citizenship.

1.3.1 Limited view

The business’s philanthropy consists of limited projects undertaken in the business’s self-interest. The main stakeholder groups that the corporation engages with are local communities and employees.

1.3.2 Equivalent view

This is based on a wider concept of corporate social responsibility based on stakeholder theory. The corporation responds to the demands of society and focuses on balancing the interests of different stakeholders. Acting according to the business’s self-interest is not the most important priority.

1.3.3 Extended view

This view is based round a partly voluntary, partly imposed view of active social and political citizenship. Corporations must promote citizens’ rights, particularly as governments have failed to provide some of the safeguards necessary for their society’s citizens and corporations are the most powerful institutions in society.

Under the extended view, organisations will promote:

  • Social rights of citizens by provision of, for example, decent working conditions
  • Civil rights, by intervening to promote citizens’ individual rights themselves or to pressurise governments to promote citizens’ rights
  • Political rights by allowing individuals to promote their causes by using corporate power

Again the focus is on a wide range of stakeholders, with a combination of self-interest promoting corporate power (and responding to political campaigns aimed at corporations) and wider responsibility towards society.



Companies have devised a number of different definitions of corporate citizenship.

Abbott Laboratories

Global citizenship reflects how a company advances its business objectives, engages its stakeholders, implements its policies, applies its social investment and philanthropy, and exercises its influence to make productive contributions to society.

At Abbott, global citizenship also means thoughtfully balancing financial, environmental and social responsibilities with providing quality health care worldwide. Our programs include public education, environment, health and safety, and access to health care. These efforts reflect an engagement and partnership with stakeholders in the pursuit of sustainable solutions to challenges facing the global community.


For AT&T, corporate citizenship means caring about the communities it is involved with, keeping the environment healthy, making AT&T a safe and rewarding place to work and behaving ethically in all its business dealings.


Responsible corporate citizenship is at the heart of The Coca-Cola Promise, which is based on four core values – in the marketplace, the workplace, the environment and the community.

  • Marketplace. We will adhere to the highest ethical standards, knowing that the quality of our products, the integrity of our brands and the dedication of our people build trust and strengthen relationships. We will serve the people who enjoy our brands through innovation, superb customer service, and respect for the unique customs and cultures in the communities where we do business.
  • Workplace. We will treat each other with dignity, fairness and respect. We will foster an inclusive environment that encourages all employees to develop and perform to their fullest potential, consistent with a commitment to human rights in our workplace. The Coca-Cola workplace will be a place where everyone’s ideas and contributions are valued, and where responsibility and accountability are encouraged and rewarded.
  • Environment. We will conduct our business in ways that protect and preserve the environment. We will integrate principles of environmental stewardship and sustainable development into our business decisions and processes.
  • Community. We will contribute our time, expertise and resources to help develop sustainable communities in partnership with local leaders. We will seek to improve the quality of life through locally relevant initiatives wherever we do business.


DHL takes its definition of Corporate Citizenship from the World Economic Forum: Corporate citizenship is about the contribution a company makes to society through its core business activities, its social investment and philanthropy programmes, and its engagement in public policy.

Texas Instruments

Beyond the bottom line, the worth of a corporation is reflected in its impact in the community. At TI, our philosophy is simple and dates back to our founding fathers. Giving back to the communities where we operate makes them better places to live and work, in turn making them better places to do business. TI takes its commitment seriously and actively participates in community involvement in three ways – philanthropy, civic leadership and public policy and grass roots efforts.


1.4 Impact of the concept of corporate citizenship

Looking at the definitions, it seems that the only one that adds a fresh perspective to the concept of the company in society is the extended view, since it emphasises the political role of the corporation and therefore the importance of its accountability. It also provides perspectives on the organisation as a global participant, having to cope with different concepts of citizenship worldwide.

In the exam you may have to bring these ideas in when discussing the role of institutional shareholders.
Exam focus point
1.5 Critiques of corporate citizenship

Corporate citizenship and corporate social responsibility have been attacked for introducing concepts that are counter to good order in the free market. The underlying idea of these criticisms is that economic selfinterest and allocative efficiency ensure maximum economic growth and therefore maximum social welfare.

On the other hand, other critics of corporate citizenship argue that it often tends to be restricted to what should be disclosed in the accounts that organisations themselves prepare, and that the range of concerns and stakeholders to which organisations are accountable is limited. More fundamentally, critics claim that its supporters operate and therefore acquiesce in the free market and take attention away from the need for fundamental structural change in economies.

Nevertheless supporters argue that corporate citizenship and corporate social responsibility reporting can be extended to illuminate inequalities in distribution in society and limitations of traditional accounting methods. Reporting has a major role in making organisations more visible and transparent.



Scottish Power’s corporate social responsibility programme has been developed from multi-stakeholder consultation. The stakeholders emphasised the need for the company to prioritise its most significant social and environmental impacts. This consultation identified 12 impacts, and Scottish Power’s corporate social responsibility report detailed what had been done to address these.

  • Provision of energy

Scottish Power was involved in a competition to develop carbon capture and storage. It spent £456 million in refurbishing its electrical network and committed £20 million in investment to its hydroelectric plant.

  • Health and safety

The Lost-Time Accident rate fell for the fifth successive year. Its children’s safety education programme won two major awards.

  • Customer experience

Scottish Power achieved the highest satisfaction rating for online energy service in the market and was ranked the second UK gas supplier. Its customer base increased by 4%.

  • Climate change and emission to air

Scottish Power’s Green Energy Trust awarded £232,809 to 20 small renewable energy projects. It entered a contract to supply all Debenhams’ properties with electricity generated from green sources and met 57% of its carbon emission reduction programme through its customer energy efficiency programme.

  • Waste and resource usage

Scottish Power increased its investment in oil containment and received a Queen’s Award in the Sustainable Development category.

  • Biodiversity

The company took steps to allow the public to watch wildfowl. A cable pipeline was drilled below the Dovey Estuary to avoid disturbance to a Site of Special Scientific Interest.

  • Sites, siting and infrastructure

Scottish Power completed connections to more renewable energy sources and implemented a programme to keep parts of its network underground in Snowdonia.

  • Employee experience

The company launched two new employee share plans. Staff participated in community development programmes that provided training for young people.

  • Customers with special circumstances

Scottish Power contributed £1 million to the Scottish Power Energy People Trust. It launched a new social tariff that combined low prices with energy efficiency advice and measures to take vulnerable customers out of fuel poverty.

  • Community

Over 58,000 primary schoolchildren benefited from Powerwise, Scottish Power’s classroom safety education programme.

  • Procurement

Scottish Power developed a group-wide responsible procurement policy and spent £74 million on customer energy efficiency measures.

  • Economic

Scottish Power provided employability training to 68 Skillseekers during the year.


2 Organisations’ ethical and social responsibility

stances                                                 12/14, 6/15

An organisation’s ethical stance relates to how it views its responsibilities to shareholders, stakeholders, society and the environment.


2.1 The ethical stance  12/11

Key term                An organisation’s ethical stance is defined by Johnson and Scholes as the extent to which it will exceed its minimum obligation to stakeholders.

Crane and Matten and Johnson and Scholes have identified a number of key assumptions (in the form of questions) on which ethical and social responsibility stances are based.

Who is responsible for ethical conduct in business? Is it the individual, or is control exercised socially, by governments?
Who is the key actor in business ethics?  Is it the corporation, or is it the Government or other collective bodies such as trade unions?
What are the key guidelines for ethical behaviour?  Again does it rest with the corporation in the form of corporate codes of ethics, or is the key guidance a legal framework negotiated with, or imposed on, business?
What are the key issues in business ethics? Are they single-decision issues involving misconduct and immorality, or are they social issues surrounding the framework of business?
To whom are businesses responsible?  Should the focus be on enhancing shareholder value or on multiple stakeholders?
How should performance be measured? Should it be measured by bottom line financial results or by pluralistic measures?
How should an ethical stance be incorporated into business activity? Should an ethical stance be seen primarily in terms of compliance with law/corporate governance codes, or should it be actively incorporated into an organisation’s mission and strategy?
How important is reputation? Does it make any difference to financial results? Should organisations strive to have a good reputation even if doing so makes no demonstrable difference to their bottom line profits?

Johnson and Scholes illustrate the range of possible ethical stances for organisations and individuals by giving four illustrations.

  • Short-term shareholder interest
  • Long-term shareholder interest
  • Multiple stakeholder obligations Shaper of society
2.1.1 Short-term shareholder interest

An organisation or individual might limit its ethical stance to taking responsibility for short-term shareholder interest on the grounds that it is for government alone to impose wider constraints on corporate governance. This approach may not look much beyond the current financial year. This minimalist approach would accept a duty of obedience to the demands of the law, but would not undertake to comply with any less substantial rules of conduct. This stance can be justified on the grounds that going beyond it can challenge government authority. This is an important consideration for organisations operating in developing countries.

2.1.2 Long-term shareholder interest

The longer view will look years rather than months ahead and consider the legitimacy of a claim in terms of its effect on long-term shareholder value. There are two reasons for taking a wider view of ethical responsibilities when considering the longer-term interest of shareholders.

  • Corporate image may be enhanced by an assumption of wider responsibilities. The cost of undertaking such responsibilities may be justified as essentially promotional expenditure.
  • The responsible exercise of corporate power may prevent a build-up of social and political pressure for legal regulation. Freedom of action may be preserved and the burden of regulation lightened by acceptance of ethical responsibilities.
2.1.3 Multiple stakeholder obligations

An organisation or individual might accept the legitimacy of the expectations and/or claims of stakeholders other than shareholders and build those expectations into its stated purposes. This would be because, without appropriate relationships with groups such as suppliers, employers and customers, the organisation would not be able to function.

The legal rights of stakeholders other than shareholders have to be respected. These are extensive in the UK, including wide-ranging employment law and consumer protection law, as well as the more basic legislation relating to such matters as contract and property. Where moral entitlements are concerned, organisations need to be practical. They should take care to establish just what expectations they are prepared to treat as obligations, bearing in mind their general ethical stance and degree of concern about bad publicity.

Acceptance of obligations to stakeholders implies that measurement of the performance must give due weight to these extra imperatives.

2.1.4 Shaper of society

It is difficult enough for a commercial organisation to accept wide responsibility to stakeholders. The role of shaper of society is even more demanding and largely the concern of public sector organisations and charities, though some well-funded private organisations or very powerful and wealthy individuals might act in this way. The legitimacy of this approach for organisations depends on the framework of corporate governance and accountability. Where organisations are clearly set up for such a role, either by government or by private sponsors, they may pursue it. However, they must also satisfy whatever requirements for financial viability are established for them.



Traidcraft aims to fight poverty through a wide range of trade-related activities. The company’s structure is that of a trading company and a development charity working together, pioneering the development of fair trade by:

  • Building lasting relationships with small-scale producers in developing countries
  • Supporting people to trade out of poverty
  • Working to bring about trade justice and fair business practices
  • Striving to be transparent and accountable

In poorer countries Traidcraft supports traders by providing business training, information and help in winning sales. In the UK Traidcraft works to encourage businesses to apply corporate social responsibility and provide social accounts. It aims to persuade UK businesses to change their practices so that they have a positive impact on their suppliers.

Traidcraft’s policy unit exists to campaign for changes in the rules of trade and work with business and institutions to deliver poverty-alleviating policies. The organisation has recently campaigned against European partnership agreements – agreements between European countries and their former colonies – on the grounds that these are forcing the colonies’ economies to liberalise too fast. This will result in farmers and industries having to compete openly with EU corporations before they are ready, and resulting in their losing markets and going out of business.


                                  2.2 Social responsibility stances 12/07, 6/09, 6/11, 12/11

Gray, Owen and Adams in their book Accounting and Accountability identify seven viewpoints of social responsibility.

Pristine capitalists The private property system is the best system; companies exist to maximise profits and seek economic efficiency. Businesses therefore have no moral responsibilities beyond their obligations to shareholders and creditors. Pursuing the objectives of stakeholders other than shareholders, and thus reducing shareholder wealth, is theft from shareholders. Shareholders have risked their money to become legal owners, and therefore they should determine objectives and strategies.
Expedients Economic systems do generate some excesses, therefore businesses have to accept some (limited) social legislation and moral requirements if such behaviour is in the business’s economic interests.
Proponents of the social contract  Organisations should behave in a way that is broadly in conformance with the ethical norms in society because there is effectively a contract or agreement between the organisations in power and those who are affected by the exercise of this power. A business effectively enjoys a licence to operate. However, this licence will only continue to be granted by society if the business’s actions deserve it. A business may therefore have to deliver benefits (or avoid causing harm) to society in general. It may also be responsible for delivering benefits to the specific groups from whom it derives its power (such as customers or employees).
Social ecologists Businesses leave a social and environmental footprint. In particular, problems exist with the human environment that large organisations have created and need to eradicate. Economic processes that result in resource exhaustion, waste and pollution must be modified. Organisations must adopt socially responsible positions accordingly. This may involve going beyond what is required or regarded as desirable by society.
Socialists  Socialists see the business framework as one class (capitalists) manipulating and oppressing another class (workers and the socially oppressed). Business therefore acts to concentrate wealth in society. Business decision-making should no longer be determined by the requirements of capitalism and materialism but should promote equality. Policies to enhance corporate social responsibility will fail if they continue to take place in the existing framework. Business should be conducted in a fundamentally different way, to redress the imbalances in society and provide benefits to many stakeholders, not just finance providers.
Radical feminists Economic and social systems privilege masculine qualities such as aggression, conflict and competition over feminine values such as co-operation and reflection. Developing corporate social responsibility in the existing masculine framework won’t work. A fundamental readjustment is required in the culture and structure of society with potentially far-reaching implications for accountability relationships. Society needs to emphasise qualities traditionally seen as feminine, such as equality, dialogue, compassion and fairness.


Human beings have no greater right to resources or life than other species and do not have the rights to subjugate social and environmental systems. Economic systems that trade off threats to the existence of species against economic objectives are immoral. Arguably businesses cannot be trusted to maintain something as important as the environment. Existing economic systems are beyond repair as they are based on the wrong values, privileging humans over non-humans. A full recognition of all stakeholders would mean that business had to be conducted in a completely different way. This viewpoint is connected with ideas on sustainability which are covered below.



Which of the seven Gray, Owen and Adams viewpoints do the following statements appear to illustrate?

Our corporate responsibility stance will appeal to our customers and ethical shareholders.  
The building of the new shopping centre shouldn’t

disrupt the lives and livelihood of the local community.

Companies should continuously strive to reduce their environmental footprint.  
The problem with stakeholder analysis such as Mendelow’s matrix is that it consistently prioritises those who provide finance over those who produce.  
Companies can never do enough to reduce their environmental footprint.  
Isn’t there room for the small shop as well as the supermarket?  
The business of business is business.  




Our corporate responsibility stance will appeal to our customers and ethical shareholders. Expedient: a very pragmatic and perhaps very common view
The building of the new shopping centre shouldn’t

disrupt the lives and livelihood of the local community.

Social contract: the idea that business

developments should take account of the impact on the local community

Companies should continuously strive to reduce their environmental footprints. Social ecologist: the difference between this view and that of the deep ecologist is the implication that this reduction should take place within the existing framework
The problem with stakeholder analysis such as Mendelow’s matrix is that it consistently prioritises those who provide finance over those who produce. Socialist: the idea that superiority of the capital providers or capitalists is inherently wrong
Companies can never do enough to reduce their environmental footprint. Deep ecologist: the implication being that business activity as currently pursued is inherently unsustainable
Isn’t there room for the small shop as well as the supermarket? Radical feminist: the key concept is that there is room for peaceful coexistence in the business world, rather than one type of business trying to drive another type out of business
The business of business is business. Pristine capitalist: a good one-line summary of this viewpoint

Bear in mind that it would be helpful to have knowledge of the motivation of the individuals making these statements.


2.3 Using the Gray, Owen and Adams corporate responsibility positions

The examiner may ask you to discuss situations using Gray, Owen and Adams’ positions, for example asking you how different positions would rank stakeholder concerns about a business development.

Step 1 Analysing the scenario

You need to look out in the scenario for key information that is relevant to each position, such as:

Pristine capitalists  The financial implications of the decision, and the extent to which each stakeholder can influence the level of profits made
Expedients  Society’s current views on social responsibility, also what the impact on profits will be of not being seen as socially responsible (the significance of reputation risk and strategic positioning)
Proponents of the social contract  Impact on the community as a whole, groups of different stakeholders within the community, the position of local or national government, importance of relationships with the local community
Social ecologists Impact (footprint) on the environment, the problems caused by the business
Socialists Indications that the owners are benefiting at the expense of the employees
Radical feminists  Adverse impact of competition or aggressive behaviour by businesses, signs feminine values are being exploited for profit
Deep ecologists  Adverse impact on any aspect of the natural environment, signs of the natural world being exploited for profit, suggestions that economic objectives are being compared with environmental objectives

Step 2 Constructing your answer 

Your answer will need to focus on factors that are relevant to each position.

Pristine capitalists  Concentrate on how shareholders’ wealth can be maximised. Other stakeholders will only be important if they threaten shareholder wealth
Expedients  Demonstrate how business will gain advantages for itself if it responds to corporate responsibility concerns. Show how business should cope with trading off economic values with social responsibilities
Proponents of the social contract  Bring out society’s norms and beliefs and the need for business to act in accordance with them. Show how the business can serve interests of different groups in society and, if necessary, reconcile competing interests
Social ecologists Concentrate on how the business should solve the human and environmental problems its activities cause and the changes necessary in business, economic and accounting practice
Socialists Focus on ways workers are being treated unfairly. Suggest methods of remedying inequalities including political and organisational change
Radical feminists  Highlight problems with pursuit of economic advantage and conflict, ways competition is unfairly promoted over co-operation/nurturing/family, or ways that feminine qualities (non-confrontation, co-operation) are being exploited for profit
Deep ecologists  Concentrate on showing how business activities inevitably impact on the natural environment and that they wrongly prioritise human needs over other needs

The question below is an example of a possible scenario.



Leavis is a firm of recruitment consultants, operating in the capital city of its home country. At its most recent board meeting, the Human Resources Director reported some worrying trends. Leavis has recently suffered a significant number of losses of experienced staff, in particular female staff. It has been suggested that they had been asked to take on work at times when they had never had to work in the past, such as during antisocial hours, sometimes in conflict with their employment contracts. Some had taken on the extra work in fear of losing their jobs.

Furthermore, a number of skilled female employees are complaining they are being paid lower rates than their male colleagues who are doing the same work. The Human Resources Director has stated that this is due to extra responsibilities taken on by many of the male employees, but this is leading to friction between staff, increased absenteeism, falling productivity and, more worryingly, falling quality of work.

The Chief Executive has also joined in the debate, as Leavis is aiming to defend its title of ‘Consultant of the Year’ (won primarily due to its high quality service from start to finish), and he and the Director of Quality Management wish to win again in view of the substantial bonuses they received for doing so last year.

The country in which Leavis operates implemented the provisions of the European Union’s social chapter a number of years ago.


Compare and contrast how Gray, Owen and Adams’ ‘pristine capitalist’, ‘socialist’ and ‘radical feminist’ positions would affect responses to stakeholder concerns about this situation.



Pristine capitalists 

The pristine capitalist’s viewpoint would view the workers solely in economic terms. The view would be that workers are paid to fulfil the company’s economic objectives. If they cannot do this, they should no longer work for the company. Pristine capitalists would deplore employment and sexual discrimination legislation that enforced on companies the non-economic objective of providing flexibility for certain workers. However, if the economic costs of disobeying the legislation were greater than the business costs that could be cut, they would recommend compliance.


The socialist viewpoint would be that the company’s ability to force these conditions on its employees reflected its superior economic power. Legislation could help to mitigate the adverse effects on employees, but it would be inadequate if it was implemented within the current framework of business decision-making. Instead decision-making processes would need to be changed so that all the workers in the company had the rights to approve their working conditions, rather than having the conditions imposed on them by shareholders acting through management.

Radical feminists

Like the socialists, radical feminists would see as inadequate legislation within the existing framework acting to mitigate the impact of aggressive labour practices. The problem over the hours could be resolved by dialogue between management and employees, and managers seeking to treat employees fairly. However they would differ from the socialists in taking the focus away from economic activity. They would argue that pursuit of aggressive competitive goals should not be given automatic priority over other life activities, particularly those that enhanced family nurturing, contemplation and spirituality. Excessive hours at work could lead to insufficient time being given to those activities that are essential for human wellbeing.


The examiner regards questions that require students to argue from a specific Gray, Owen and Adams position as a good test of application and has frequently set questions on this area.
Exam focus point

3 Social and environmental effects of economic activity



There is increasing concern about businesses’ relationship with the natural environment. Businesses may suffer significant costs and a loss of reputation if problems arise.

3.1 Significance of environmental effects

Is there a problem and how serious is it?



The World Wildlife Fund warned in a report published in October 2006 that current global consumption levels could result in a large-scale ecosystem collapse by the middle of the 21st century. It warned that if demand continued at the current rate, two planets’ worth of resources would be needed to meet the consumption demand by 2050. The loss in biodiversity is the result of resources being consumed faster than the planet can replace them.

The report based its findings on two measures.

Living Planet Index – assessing the health of the planet’s ecosystems by tracking the population of over 1,000 vertebrate species. It found that species had declined by about 30% since 1970.

The Ecological Footprint – measuring the amount of biologically productive land and water to meet the demand for food, timber and shelter and absorb the pollution from economic activity. The report found that the global footprint exceeded the world’s biocapacity by 25% in 2003, which meant that the earth could no longer meet what was being demanded of it.



Most seriously of all, there is the issue of whether business activities have contributed to climate change.

Intergovernmental Panel 

The Intergovernmental Panel on Climate Change reported in February 2007. The report emphasised that global atmospheric concentrations of carbon dioxide, methane and nitrous oxide have increased markedly as a result of human activities since 1750 and now exceed pre-industrial values. The main causes are fossil-fuel usage (the most significant cause), land-use change and agriculture.

The report stated that evidence of warming of the climate system is unequivocal, as is seen from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level. Numerous changes in climate are long term. These are most likely to be due to increases in greenhouse gas concentrations.

For the next two decades a warming of about 0.2°C is projected based on projected levels of greenhouse gas emissions. Continued greenhouse gas emissions at or above current rates would cause further warming and induce many climate changes in the 21st century that will be larger than those observed in the 20th century. These include increases in heatwaves, spells of heavy rain and intensity of tropical cyclones.

Stern report  

A few months before the Intergovernmental panel report was published, a UK report was published on the costs of climate change. The report’s author was Sir Nicholas Stern, former chief economist at the World Bank, and adviser to the former UK Chancellor of the Exchequer Gordon Brown who commissioned the report. The report warned of a global recession that could cut between 5% and 20% from the world’s wealth later this century, unless the world invests now in the technologies needed to create a global lowcarbon economy.

The effects would be on a scale similar to those associated with the two World Wars and the 1930s depression. They include huge disruption to African economies as drought hits food production, up to a billion people losing water supplies, hundreds of millions losing their homes to sea level rises and potentially big increases in damage from hurricanes.

Stern called for a global investment of about 1% per year of global GDP over the next 50 years to combat these threats. His findings contradicted past claims from economists that the world would do better adapting to climate change rather than trying to halt it. In response to the report, Gordon Brown called for industrialised countries to cut their carbon dioxide emissions by at least 30% by 2020 and by at least 60% by 2050.

World Wildlife Fund

The World Wildlife Fund’s Climate Savers programme encourages companies to reduce carbon dioxide emissions by:

  • Increasing the energy efficiency of buildings and factories
  • Taking advantage of recent advances in combined heat and power to increase energy efficiency and lower energy costs
  • Purchasing power generated from renewable energy sources
  • Integrating next-generation efficiency measures into the design of new buildings, factories and products
  • Integrating energy and environmental efficiency into building, product and process design
  • Optimising existing manufacturing processes
  • Educating employees, customer base and supply chain to help take advantage of best practices for greenhouse gas mitigation

Examples of companies who have joined the programme include:

  • Johnson & Johnson, 30% of whose total US energy use is from green power sources such as wind power, on-site solar, low-impact hydro, renewable energy sources
  • IBM, whose energy-saving methods include installing motion detectors for lighting in bathrooms and copier rooms, rebalancing heating and lighting systems and resizing high purity water pumping systems in semi-conductor manufacturing lines
  • Polaroid, which is upgrading and replacing compressors, chillers, boilers, hot water systems, lighting systems and motors, purchasing green power and switching to cleaner forms of fuel for on-site operations; Polaroid’s Facilities organisation now requires each employee to identify energy-saving projects as part of their performance evaluation
  • Nike, which offsets the majority of its business travel carbon dioxide emissions through partnerships with air carriers, rental car companies, government energy departments and the retail market
  • Lafarge, the cement manufacturer which uses industrial by-products such as fly-ash from coalfired power plants and slag from the steel industry as substitutes for raw materials that consume significant energy to produce; Lafarge has also shifted some of its fuel use to waste fossil fuels (industrial waste, tyres, oils, plastic and solvents) and waste biomass (rice husks, coffee shells, animal meal)

The WWF points out the following benefits of joining Climate Savers.

  • Knowledge increase, providing an opportunity to develop relationships with other stakeholders, business colleagues and technology experts
  • Visibility through publicity in the WWF’s literature and press reports
  • Cost advantages, greater efficiency leading to reduction in energy costs

Climate change will be one of the most topical areas of your syllabus, so we would advise you to read and keep copies of stories on how businesses are responding to climate change.


Clearly there are concerns which need to be closely examined. Note, however, that organisations can also have positive impacts, for example improving the energy efficiency of their buildings.

3.2 Impact on environment of economic activities
Environmental footprint is the impact that a business’s activities have on the environment including its resource consumption and pollution emissions. It concerns the environmental consequences of a business’s inputs and outputs.

Key term

At an individual firm or business level, environmental impact can be measured in terms of environmental costs in various areas. Much business activity takes place at some cost to the environment. A 1998 IFAC report identified several examples of impacts on the environment.

  • Depletion of natural resources
  • Noise and aesthetic impacts
  • Residual air and water emissions
  • Long-term waste disposal (exacerbated by excessive product packaging)
  • Uncompensated health effects
  • Change in the local quality of life (through for example the impact of tourism)

With some of these impacts, however, a business may be contributing negatively to the environment but positively in other ways. An increase in tourism will provide jobs and other economic benefits to the community, but could lead to adverse effects on the environment as the roads become more crowded or because of infrastructure improvements.

Ways of assessing the impact of inputs include the measurement of key environmental resources used, such as energy, water, inventories and land. Measurement of the impact of outputs includes the proportion of product recyclability, tonnes of carbon or other gases produced by company activities, waste or pollution. A business may also be concerned with the efficiency of its processes, maybe carrying out a mass balance or yield calculation.

3.2.1 Direct and indirect impacts

Measures of impact can apply directly and narrowly to the organisation, or they can be applied more broadly to the indirect, associated impacts that it has. For a manufacturer, indirect measures could report on the forward and backward supply chains which it uses from sourcing its raw materials to bringing its products to market. A bank could include the environmental consequences of the activities it finances through its business loans. However, reporting of indirect measures is rare, as the other parties are primarily responsible for reporting the direct impacts that they have. Clearly also it would be particularly difficult for a bank to track the impacts of all its business borrowers.



In May 2008 Marks & Spencer (M&S) introduced a 5p charge for its single-use food carrier bags in all its UK stores. M&S aims to:

  • Encourage customers to reduce their bag usage by changing from single-use carrier bags to reusable bags
  • Raise monies for the charity Groundwork to invest in creating or improving greener living spaces (parks, play areas and gardens).

In 2012/13 M&S used 274 million single-use carrier bags, a reduction of 58% since 2006/07 (657 million bags).


3.3 Impact on organisation of environmental costs

In addition, the IFAC report listed a large number of costs that the business might suffer internally. Direct or indirect environmental costs

  • Waste management
  • Remediation costs or expenses
  • Compliance costs
  • Permit fees
  • Environmental training
  • Environmentally driven research and development
  • Environmentally related maintenance
  • Legal costs and fines
  • Environmental assurance bonds
  • Environmental certification and labelling
  • Natural resource inputs
  • Recordkeeping and reporting

Contingent or intangible environmental costs

  • Uncertain future remediation or compensation costs
  • Risk posed by future regulatory changes
  • Product quality
  • Employee health and safety
  • Environmental knowledge assets
  • Sustainability of raw material inputs
  • Risk of impaired assets
  • Public/customer perception
A Pilot Paper question asked for a definition of environmental footprint.

Exam focus point

Clearly, failing to take sufficient account of environmental impact can have a significant impact on the business’s accounts as well as the outside world.

You may be asked about the main impacts on the environment that a particular organisation’s activities are likely to have. You will need to use a little imagination, but hopefully the ideas we suggest in this chapter will help you come up with suggestions.

Exam focus point

3.4 Social impacts of activities  12/12

Key term                Social footprint is the impact of an organisation on human, social and constructed capitals (Anthro capitals). (The Center for Sustainable Organizations)

Partly because of the publicity generated by reports like the recent WWF report, there is now significant focus on the environmental impact of businesses’ activities. However, corporate social responsibility does not start and end with the environment. Organisations need to consider other aspects of corporate social responsibilities.

The definition of social footprint formulated by the Center for Sustainable Organizations is measured in terms of impacts that arise from organisational activities.

‘Sustainability entails the maintenance and/or production of vital capitals as required to ensure human (and non-human) well-being.’

The definition concentrates on anthro capital which is created by people and can be produced at will – more can always be created. It is thus different from natural capital which humanity cannot reproduce. The focus is on providing enough resources to maintain levels of social capital.

The Center provides more details about the categories of capital given in the definition. The different types of capital are all used to take effective action and ensure their own wellbeing.

Human  Personal health, knowledge, skills, experience, human rights, ethical entitlements. Relied on by individuals
Social  Social networks and mutually held knowledge. Relied on by collectives
Constructed Material things such as tools, technologies, roads, utilities and infrastructures

Again, business strategies may have positive and negative consequences for social sustainability. A business that outsources production to a low-cost economy abroad may create new jobs and provide training and development opportunities for the employees in that country. However, it may also be accused of exploiting those employees by paying them an insufficient wage. In addition, the jobs that may be lost in the business’s home country will have adverse social consequences such as increased unemployment and the need for benefits to support the unemployed.

3.4.1 Stakeholder expectations

Pressure on organisations to widen the scope of their corporate public accountability comes from increasing expectations of stakeholders and knowledge about the consequences of ignoring such pressures.

Stakeholders in this respect include communities (particularly where operations are based), customers (product safety issues), suppliers and supply chain participants and competitors. Issues such as plant closures, pollution, job creation, sourcing, etc can have powerful social effects for good or ill on these stakeholders.



These are a few examples in which consumers have been successful in applying pressure to seek changes in business practices.

  • Consumers began boycotting Shell filling stations in large numbers, leading the company to reverse its policy on a controversial environmental subject concerning the disposal of an oil drilling platform.
  • Pressure was applied to change the Nestlé company’s practice of exploiting the market for processed milk in developing countries.

Similar campaigns have targeted Nike (alleged exploitation of overseas garment-trade workers) and McDonalds (alleged contribution to obesity and related illnesses).


3.4.2 Reputation risk

We have discussed the importance of loss of corporate reputation in earlier chapters. Increasingly a business must have the reputation of being a responsible business that enhances long-term shareholder value by addressing the needs of its stakeholders – employees, customers, suppliers, the community and the environment. 



In April 2008 Greenpeace protestors dressed as orangutans stormed a number of sites owned by Unilever in Europe. The protest was against the damage to Indonesian tropical rainforests by the production of palm oil, used in many Unilever products. As well as damaging the forests, the process of deforestation has resulted in large emissions of carbon dioxide and also threatened local wildlife (including orangutans).

Soon after the protest, Unilever announced that it would be drawing all the palm oil it purchased from sustainable sources by 2015. However, Greenpeace wanted Unilever to take tougher action, by ceasing to buy from suppliers who were breaking the law. Enquiries by Unilever embarrassingly revealed that all its Indonesian suppliers were flouting Indonesian law or sustainability standards.           

Reputation can be affected adversely even if the company has good intentions. An example was Monsanto believing that investment in genetically modified (GM) products would be seen as helping farmers in developing countries by increasing yields. However, they failed to take on board the fact that these farmers usually save seed from one crop to sow the following season. This would not be possible with GM crops.

Bad publicity portrayed Monsanto as exploiting, rather than helping, developing countries. In addition, inadequately addressed environmental concerns about the effect of GM crops on nature led to:

  • A consumer boycott of GM products
  • Trial crops being destroyed           A tumbling share price

The final straw was the news that Monsanto’s UK staff canteen was GM free!

Mining companies in Canada are carrying out social risk assessment for major projects, assessing how the local social, economic and cultural conditions may affect the project. These assessments reflect the impact that mining projects often have on environmentally and socially sensitive areas such as wildlife habitats, biodiversity points and indigenous communities. Linked issues may include poverty, conflict, political instability and human rights violations. Failure to take account of these issues may result in serious opposition, cultural conflict, delays in granting of mining rights and rejections of mining licences.

Social risk assessments aim to engage stakeholders and understand their concerns as well as assessing key social and political issues. They feed through into strategic and operational plans as well as community investment, stakeholder engagement and communication plans.


June 2010 Question 1 asked students to discuss the social and environmental impacts of a nuclear power station.

Exam focus point

3.5 Corporate social responsibility and risk management

The Deloitte (2008) guide The Risk Intelligent Approach to Corporate Responsibility and Sustainability suggests that sustainability can be approached from a perspective of risk management, seeing corporate responsibility issues as providing opportunities as well as dangers. This should in turn mean that the organisation’s approach to these issues is aligned and integrated with strategic initiatives in other parts of the business.

Deloitte recommends a nine-stage approach.

1 Understanding the present This includes assessing regulatory trends, benchmarking against competitor activity, finding out what is important to stakeholders, understanding all the CSR activity currently happening in the organisation
2 Envisioning the future  Assessing the legacy the organisation wishes to leave. This will mean integrating CSR activities with business strategies, for example a publishing company sending its employees to libraries and schools, or donating books
3 Planning the journey CSR issues should be prioritised using a gap analysis between current and future states, and the organisation and its competitors. Assess opportunities for action, risks of inaction and not achieving objectives
4 Planning and building The human resource element is vital, including example set and oversight by senior management. CSR achievements should be built into performance reviews and remuneration. Assess availability of grants and tax concessions for green behaviour. Also consider broadening stakeholder base and organisation’s ethical culture
5 Execution Develop in controlled fashion, enhancing governance procedures related to implementation
6 Review and revision Develop metrics to measure activities. Use hard data rather than impressions, though stakeholder feedback is important
7 Reporting and    communicating A CSR development programme may mean reporting on CSR needs to be revamped. The organisation could report in accordance with various external reporting standards or produce customised report
8 Assuring internally Adapt measures used initially to assess CSR development to monitor how the organisation is doing. Use internal resources such as internal audit, legal, health and safety and human resources to assist in development
9 Assuring externally When CSR reaches a certain level, seek verification from outside the organisation of assertions in CSR report
                                  3.6 Corporate Social Responsibility                                   6/15

The primary purpose of a business organisation is to make profits, thereby increasing the wealth of its owners, the shareholders. Businesses do not, however, exist in splendid isolation; they are dependent on the society in which they operate, and they should therefore contribute to that society. Businesses make use at least in part of the infrastructure of the country or countries in which they operate, for example roads, utilities and other social goods paid for through taxation. For this reason it can be seen as only fair that businesses are aware of their social responsibility, and their ethical reputation can depend on the extent to which they take this responsibility seriously.

3.7 CSR Strategy

A business that has a strategy in place to demonstrate its corporate social responsibility will have a deliberate plan with specific activities identified. Examples of CSR activities might include:

  • Making donations to charity
  • Contributing to the activities on non-governmental organisations (NGOs)
  • Supporting local good causes
  • Including stakeholders in key decisions
  • Managing the social and environmental impacts of the business

Having a strategy means making choices, providing funding for the CSR initiatives chosen, and monitoring the outcomes.

3.8 Strategic CSR

It could be argued that CSR activities should reflect the ethos of the business, which leads to the concept of strategic CSR. When CSR activities become strategic, they are concerned with the long-term success of the business, and should therefore be beneficial to the business as well as to society.

Examples of strategic CSR initiatives might include:

  • A pharmaceutical company funding the training of medical staff, in the hope that when qualified they will source drugs from that company.
  • A bank providing free internet training for senior customers, who might then be disposed to buying financial products.
  • Encouraging employees to nominate and get involved in good causes, in order to develop loyalty to the company.

Sponsoring sports teams in return for advertising space on shirts, other merchandise, and at the ground.

The decision as to whether CSR should be strategic is an ethical one. From a pristine capitalist point of view all CSR activities should be strategic, since all of a company’s money should be used to benefit shareholders. On the other hand a deep green perspective would argue that, because businesses take from society, they should give something back.

One difference between ‘CSR strategy’ and ‘strategic CSR’ is the extent to which an organisation will promote the support given to a CSR cause, making it more likely that strategic CSR will be more visible. Consequently, the ethical viewpoint most likely to support this could be that of the expedient (promoting strategic CSR in a way that benefits the organisation).


In the June 2015 exam there was a question on CSR Strategy and Strategic CSR. The examining team has produced a technical article on this area.

Exam focus point

  4 Sustainability 6/08, 12/10, 12/13  
Sustainability means limiting use of resources to what can be replenished.

The Global Reporting Initiative provides a framework for a sustainability report.

Full cost accounting is a method of accounting for all relevant costs including externalities.

4.1 Defining sustainability

Key terms              In relation to the development of the world’s resources, sustainability has been defined as ensuring that development meets the needs of the present without compromising the ability of future generations to meet their own needs.

For organisations, sustainability involves developing strategies so that the organisation only uses resources (inputs) at a rate that allows them to be replenished (in order to ensure that they will continue to be available). At the same time emissions of waste (outputs) are confined to levels that do not exceed the capacity of the environment to absorb them.  

Sustainable development is development that is ‘… not a fixed state of harmony, but rather a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development and institutional change are made consistent with future as well as present

needs’.                                                                                             (Brundtland report)

Sustainability in this context does not mean the ability of the business to continue as a going concern.

4.1.1 The Brundtland report

The United Nations convened the World Commission on Environment and Development, which became known as the Brundtland committee after its chairman, in the 1980s. The committee reported in 1987. Its brief was to propose long-term environmental strategies for achieving sustainable development by the year 2000 and to recommend ways the international community could co-operate in dealing with those concerns.

The report’s definition of sustainability, quoted in the Key terms box above, has become a standard definition. When defining sustainability the committee emphasised two key concepts.

  • The concept of needs, in particular the essential needs of the world’s poor
  • The limitations imposed by the state of technology and social organisations on the environment’s ability to meet present and future needs

4.1.2 Recommendations of the Brundtland report

The commission emphasised that sustainable development could successfully be pursued. However, it would only be possible if development policies paid attention to such considerations as changes in access to resources and the distribution of costs and benefits. Population expansion can also increase the pressure on resources. Therefore sustainable development could only be pursued if demographic developments are consistent with changing productive potential.

At the time the report was issued, the basic needs of many in society were not being met, and this increased the risk of ecological crises. If for example a drop in prices left farmers feeling vulnerable, then they could overexploit natural resources to maintain incomes. This risk was enhanced further by much of the world’s population living beyond the world’s ecological means, for example in their pattern of energy use. Sustainable development therefore required the promotion of values that encouraged ecologically possible consumption.

Above all, sustainable development must not endanger the natural systems that support life on earth, the atmosphere, water, soil and living beings. The report summed up sustainable development as requiring:

  • A political system securing effective citizen participation in decision-making
  • An economic system able to generate surpluses and technical knowledge on a self-reliant and sustained basis
  • A social system providing solutions for the tensions arising from disharmonious developments
  • A production system respecting the obligation to preserve the ecological base for development
  • A technological system searching continuously for new solutions
  • An international system fostering sustainable patterns of trade and finance
  • An administrative system that is flexible and has the capacity for self-correction

4.1.3 Extension of sustainability

Although it’s possible to come up with a general definition of sustainability that’s uncontroversial but vague, problems arise when you try to extend that definition. Key issues include whether sustainability just implies natural sustainability, or whether social and economic sustainability are important as well. Particularly if social and economic sustainability are acknowledged, there is also the issue that sustainability may vary over time and between groups.

One approach to sustainability is known as the triple bottom line (or ‘TBL’, ‘3BL’, or ‘People, Planet, Profit’) approach.

  • People means balancing up the interests of different stakeholders and not automatically prioritising shareholder needs.
  • Planet means ensuring that the business’s activities are environmentally sustainable.
  • Profit is the accounting measure of the returns of the business.



Dow Jones Sustainability Index

The Dow Jones Sustainability Index is one of a number of global indexes that have been developed to assess corporate sustainability. The creators of the index argue that corporate sustainability is attractive to investors, because it aims to increase long-term shareholder value by gearing strategies and management to harness the potential for sustainability products and services while also reducing and avoiding sustainability costs and risks. Companies included in the index as sustainability leaders are expected to show superior performance and favourable risk and return profiles.


Dimension Criteria
Economic Corporate governance

Codes of conduct/Compliance

Risk and crisis management

Customer relationship management

Innovation management

Industry specific criteria

Environment Environmental management system

Climate strategy

Product stewardship


Industry specific criteria

Social Human capital development

Talent attraction and retention

Occupational health and safety

Stakeholder engagement

Social reporting

Industry specific criteria

The index is designed to provide quantification of sustainability strategies and management of sustainability opportunities, risks and costs. A corporate sustainability assessment is carried out, and companies are ranked and selected for the index if they are among the sustainability leaders in their field. The assessment uses the following criteria.

Once the initial assessment has taken place, companies’ performance is monitored and they are removed from the index if their performance is judged unsatisfactory. A key aspect of this monitoring is seeing how the company copes with crisis situations that carry a serious reputation risk.

Supersector leaders in the Dow Jones index in 2011 include Pearson, the leader in the media sector. Principal areas in which Pearson reports its environmental and sustainability performance include:

Property management Pearson has targets to reduce energy use and is investing in renewable energy at some of its sites.
Business travel Ways in which Pearson is trying to reduce air travel include upgrading videoconferencing facilities.
Climate neutrality Initiatives include a carbon management programme focusing on energy efficiency in buildings, use of renewable energy sources and establishing partnerships that deliver carbon offsets.
Supply chain Pearson has introduced various initiatives to improve resource efficiency, such as using the whole tree rather than part of the tree, reducing the base weight of papers used and custom publishing. Environmental responsibility is included in contracts between Pearson and its suppliers. Pearson collects environmental data on the papers it purchases. It holds training sessions for production teams around the world and discusses its approach to paper purchasing with various stakeholders. Pearson has also sought accreditation from the Forest Stewardship Council.
Employee engagement Green messages are a regular part of Pearson’s internal communications. It uses green teams – volunteers working to improve environmental practice. An intranet site offers ideas for carbon reductions, links to local green groups and performance reports. Pearson’s books, magazines and newspapers cover climate change.

FTSE4Good Index

The  FTSE4Good index aims to appeal to investors who are looking to:

  • Invest in companies that demonstrate good standards in corporate social responsibility
  • Minimise the social and environmental risks within their portfolios
  • Capitalise on the benefits of good corporate responsibility (eg eco-efficiencies, improved brand image)
  • Encourage companies to be more responsible

To be included in the index, companies need to demonstrate that they are working towards:

  • Environmental management
  • Climate change mitigation and adaption
  • Countering bribery
  • Upholding human and labour rights 
  • Supply chain labour rights

There are a few sector exclusions from the index.

  • Tobacco producers
  • Companies involved in nuclear weapons manufacture 
  • Companies manufacturing whole weapons systems


If a question asks about sustainability, make sure you appreciate the limits of what you are being asked. June 2008 Question 1 required students to discuss environmental sustainability, and no marks were awarded for discussion of other kinds of sustainability.

Exam focus point

4.2 Aspects of sustainability

4.2.1 Sustainable for whom

Issues here include the species to be sustained other than mankind and the level of world population that should be sustained, natural resources, pollution absorption and the needs of developing countries.

We examined the deep ecologist viewpoint earlier in this chapter, that man has ‘had his chance’ and that socioeconomic considerations are irrelevant to sustainability. They are intrusions on the natural world. Other views are that population pressures and social and economic disparities inevitably have to be addressed as well if sustainability for other species is to be maintained. However, what then happens if there is conflict between social and ecological sustainability?

4.2.2 Sustainable in what way

The ecological focus would be on preserving the ability of the environment to function as naturally as possible, continue to support all life forms on the planet and maintain its evolutionary potential.

Extending the definition to social sustainability poses various problems. Social sustainability has been defined as including personal growth and development, maintaining physical and mental health, equity, infrastructure and involvement in decision-making. However, to what extent are these human needs and to what extent are they human wants (which may not be necessary)? There is also the issue of the extent to which social sustainability means preserving the existing institutions and customary behaviour of society, or whether these need to change (see the discussion on strong sustainability below).

Economic sustainability is even more controversial. Critics claim that it defines wellbeing in terms of production of goods and services. Social and ecological sustainability are only seen as important in providing a framework for a system to operate that supports production.

Another significant issue here is whether the developing world should be encouraged to reach and sustain the same level of economic development as the Western economies. One argument is that without economic growth the investment necessary for ecological sustainability will not be available. However, encouraging all world economies to reach the levels of economic growth that may have caused environmental degradation may lead to more, not less, rapid resource depletion.



Various studies have shown that we would need two or more worlds that each had the same level of natural resources that this world has to sustain this world, if all countries enjoyed the same rate of consumption per head as the developed countries.


4.2.3 Sustainable for how long

A key issue here is generational equity, ensuring that future generations are able to enjoy the same environmental conditions, and in social terms per capita welfare is maintained or increased.

However, with raw materials having finite levels, any use of these resources ultimately cannot be sustained. In other areas the question of how long things can be sustained is bound up with the level at which they will be sustained. Perspectives on how to maintain a sustainable society indefinitely may also have to change in the light of changing climatic and ecological conditions, some of which are independent of whatever mankind does.

4.2.4 Sustainable at what cost

Again the deep ecologist view is that threats to the existence of other species are unacceptable, and that a system that rewards ecologically unsustainable behaviour is flawed and needs to be changed.

Those who hold other views must address the issue of non-renewable resources and whether some ecological capital is irreplaceable. Should the emphasis therefore be on preservation, or is substitution of other resources or capital possible? Alternatively would it be possible to compensate future generations for the resources and capital this generation exhausts?

4.2.5 Sustainable by whom

Ideally by the whole world, but meaningful global international agreements look unlikely at present. Sustainability must therefore be on an individual basis by nations, individuals – and businesses.

4.3 Strong and weak sustainability

One distinction that is often drawn in the sustainability debate is the distinction between strong and weak sustainability. These two approaches to the idea of sustainability relate to their supporters’ views of the extent, causes and solutions.

4.3.1 Weak sustainability

Supporters of this view are concerned to prevent the kind of catastrophe that would threaten society. They believe that the focus should be on sustaining the human species and the natural environment can be regarded as a resource. However, the human race needs to have better mastery of the natural environment. This can be achieved by incremental change driven by market forces and legal regulation and requiring economic development to drive the technological changes necessary. Weak sustainability argues that it is possible to substitute natural and capital-made stocks that have been reduced with other items. Sustainability can be achieved within the next 30-50 years.

The weak sustainability viewpoint tends to dominate discussion within the Western economic sphere. However, critics suggest that it is based on hope rather than evidence, and is ultimately underpinned by a desire to maintain existing economic and social systems.

4.3.2 Strong sustainability

Supporters of strong sustainability argue that far more fundamental changes are needed in society. The viewpoint is linked with other critiques of our society that we have seen in earlier chapters such as the feminist or anti-capitalist agenda. Supporters stress the need for harmony with the natural world. It is important to sustain all species, not just the human race. They see a requirement for fundamental change, including a change in how man perceives economic growth (and whether it is pursued at all). They suggest that we have little or no idea at present of what sustainability would be, and the timespan for achieving it is likely to be very long, perhaps over a century.

Supporters of strong sustainability argue man-made capital stocks cannot be substituted for natural stocks. Use of natural capital stocks will inevitably affect future generations’ abilities to meet their own needs.

Supporters of strong sustainability stress the need for participation and democracy in achieving sustainable growth. However, this course faces opposition from political and business leaders who are benefiting from the current system.

4.4 Businesses and sustainability
Externality is the difference between the market and social costs, or benefits, of an activity. An externality is a cost or benefit that the market fails to take into account.

Key term

How can individual businesses help to promote sustainability, bearing in mind that competitors have other priorities? One important way is to develop environmental reporting systems that provide information about the external environmental effects – the externalities – of their activities. This data can then be used in decision-making processes, both of government and of other organisations, by internalising the costs of environmental effects. In addition, better costing of externalities will influence the price mechanism and therefore the economic decisions that are taken.

4.5 External social and environmental reporting

As well as developing a system of internal reporting on social and environmental issues, a business may also provide social and environmental data in its external reports. This can be seen as an aspect of a business being a corporate citizen that receives benefits from, and therefore owes duties back to, society. Accountability as a corporate citizen can partly be demonstrated by not just reporting items that can be easily measured and are required by laws, regulations or accounting standards. Large companies are finding the pressure to report difficult to resist.

4.6 Media of reporting

Environmental reporting is done in a number of different media, including annual reports, standalone reports, company websites, advertising or promotional media. Recently, larger companies in particular have produced a separate report on social and environmental issues, although many companies still include the information within their annual reports. Titles used for separate reports have included Sustainability report, Citizenship report, Corporate responsibility report and Environment, Social and Governance report.

                                 4.7 Contents of environmental reports                             6/13

Reports generally include narrative and numerical information about environmental impact. Narrative information includes objectives, explanations and reasons why targets have or have not been achieved. Reports can also address concerns of specific internal or external stakeholders. Useful numerical measures can include pollution amounts, resources consumed or land use.



BT’s Social and Environmental Report for the year ended 31 March 2011 complies with the Global Reporting Initiative Guidelines (discussed below). To give an overview of the company’s social and environmental performance, the report selects 12 non-financial key performance indicators.

  • Customer service – 3% increase in service quality
  • Employee engagement index (measure of success of BT’s relationship with employees) – a small rise to 3.61 out of 5
  • Diversity – BT maintains a top 10 placement in 4 out of 5 major diversity benchmarks
  • Health and safety lost time injury rate – up from 0.209 cases per 100,000 working hours to 0.225 cases per 100,000 working hours
  • Health and safety sickness and absence rate – down from 2.46% calendar days lost due to sickness/absence to 2.41% calendar days lost
  • Supplier relationship success – 86% satisfaction
  • Ethical trading (a measure of the application of BT’s supply chain human rights standard) – 70 risk assessments with 100% follow-up
  • Community effectiveness (such as charity partnerships and support for learning and skills and helping people get online) – rated at 98%
  • Investment in community improvements – 1.9% of pre-tax profits
  • Global warming CO2 emissions – fell from 653,000 to 628,000 tonnes
  • Waste to landfill and recycling (a measure of use of resources) – reduction of 69%
  • Ethical performance – a small increase to 4.16 out of 5 in a measure designed to assess employee awareness and training, compliance with the company’s ethical code and behaviour with integrity


4.8 Advantages of external social and environmental reporting
  • Transparency and accountability

Social and environmental reporting can be seen as fulfilling the key governance principle of transparency, and the requirement of various governance codes for the board to provide a balanced and understandable assessment of the company’s position. This includes negative impacts such as environmental impacts. Environmental reporting can strengthen accountability to shareholders by providing shareholders with important information about how their agents, the directors, are running the company. Because environmental reports include details about use of resources and pollution over time, companies are also demonstrating their accountability to future generations.

  • Impact on internal control systems

The need to specify the impact on the environment in external reports means that environmental reporting must be adequately integrated into internal control systems. Companies need to establish internal measurement systems that collect and process the data required to support environmental reports. As well as spurring reductions in environmental impact, the information that these systems generate can be used to develop an understanding of how to reduce cost and waste and improve internal efficiency.

  • Addressing investor concerns about risk

Investors and other stakeholders are becoming more interested in the level of environmental disclosures, seeing them as very important disclosures in the context of risk management and strategic decision-making. This can lead to investors seeing companies as lower risk, as more risks are known about and reported, hence companies’ cost of capital falling.

  • Improved reputation

An increasing number of companies see voluntary environmental reporting as a means of demonstrating their commitment to good practice and hence enhancing their reputation for ethical and competent behaviour, leading to marketing opportunities as green companies. In particular, companies that have a high environmental impact, such as oil or gas companies, often provide the most information about their impacts.

  • Damage limitation

When a company is involved in a well-publicised incident or commits a serious environmental error, it can result in stakeholders having doubts about the legitimacy of its activities. This can mean that threats to its licence to operate arise or its relationships with society are damaged. Environmental reporting can be used to address these concerns by providing reassurance that the company has learnt lessons from its experiences.

4.9 The Global Reporting Initiative (GRI)

Companies can adopt whatever approach they choose when reporting voluntarily on environmental impacts. However, two developments designed to provide guidance on supplying more social and environmental information are the Global Reporting Initiative (GRI) and the development of full cost accounting.

The Global Reporting Initiative, as its name suggests, is a reporting framework and arose from the need to address the failure of the current governance structures to respond to changes in the global economy.

The GRI aims to develop transparency, accountability, reporting and sustainable development. Its vision is that reporting on economic, environmental and social importance should become as routine and comparable as financial reporting.



The forum SustainAbility’s Tomorrow’s Value rating examines how well companies manage their most pressing social and environmental issues. The Tomorrow’s Value Rating of the 15 largest companies in Silicon Valley in America found that many of them were developing innovative practices, but were doing less well in day-to-day matters. They showed commitment to industry initiatives such as the Global eSustainability Initiative. They also showed greater concern about how their products, services and initiatives tie into the goal of generating positive change in society, for example investing in social media to create more interactive stakeholder engagement. However, day-to-day practices are weaker, with reporting lacking detail of areas of concern to stakeholders, including employee development, community investment, labour standards, economic contributions and supplier development.


4.9.1 GRI Guidelines

The GRI published revised guidelines in 2006.

The main section of the Guidelines (Report contents) sets out the framework of a sustainability report. It consists of five sections:

  • Strategy and analysis. Description of the reporting organisation’s strategy with regard to sustainability, including a statement from the CEO. In addition, there should be a description of key impacts, risks and opportunities. This section should focus firstly on key impacts on sustainability and associated challenges and opportunities, and how the organisation has addressed the challenges and opportunities. It should secondly focus on the impact of sustainability risks, trends and opportunities on the long-term prospects and financial performance of the organisation.
  • Organisational This should provide an overview of the reporting organisation’s structure, operations, markets served and scale.
  • Report parameters. Details of the time and content of the report, including the process for defining the report content and identifying the stakeholders that the organisation expects to use the report. Details should also be given of the policy and current practice for seeking external assurance for the report.
  • Governance, commitments and engagement structure and management systems. Description of governance structure and practice, and statements of mission and codes of conduct relevant to economic, environmental and social performance. The report should give a description of charters, principles or initiatives to which the organisation subscribes or which the organisation endorses. The report should also list the stakeholder groups with which it engages and detail its approaches to stakeholder engagement.
  • Performance indicators. These divide measures of the impact or effect of the reporting organisation into integrated indicators.

4.9.2 Indicators in the GRI framework

GRI structures performance indicators according to a hierarchy of category and aspect.

Category Aspect
Environmental Materials



Emissions, effluents and waste

Products and services




Human rights Investment and procurement practices


Freedom of association and collective bargaining

Child labour

Forced and compulsory labour

Security practices

Indigenous rights

Scale of assessment

Remediation of grievances

Category Aspect
Labour practices and decent work Employment

Labour/management relations

Occupational health and safety

Training and education

Diversity and equal opportunity

Equal remuneration for women and men

Society Local community


Role in public policy

Anti-competitive behaviour


Product responsibility Customer health and safety

Product and service labelling

Marketing communications

Customer privacy


Economic Economic performance

Market presence

Indirect economic impacts

                                 4.10 Integrated reporting                                        12/14, 6/15

The King report of 2009 required South African companies to integrate reporting on sustainability issues with reporting on financial results and operations. The report stressed the need to demonstrate positive and negative impacts, and the need to report on goals and strategies as well as economic, social and environmental issues.

In December 2013 the International Integrated Reporting Council (IIRC) published The International Integrated Reporting Framework.

The aim of integrated reporting is to demonstrate the linkage between strategy, governance and financial performance and the social, environmental and economic context within which the business operates. By making these connections, businesses should be able to take more sustainable decisions, helping to ensure the effective allocation of scarce resources. Investors and other stakeholders should better understand how an organisation is really performing. In particular, they should make a meaningful assessment of the long-term viability of the organisation’s business model and its strategy.

Integrated reporting should also achieve the simplification of accounts, with excessive detail being removed and critical information being highlighted.

4.10.1 Capitals

Integrated reporting is designed to make visible the capitals (resources and relationships) on which the organisation depends, how the organisation uses those capitals and its impact on them.

Financial  Funds available for use in production obtained through financing or generated through operations
Manufactured Manufactured physical objects used in production or service provision:

•        Buildings

•        Equipment

•        Infrastructure

Human Skills, experience and motivation to innovate:

•        Alignment and support for organisation’s governance framework and ethical values

•        Ability to understand and implement organisation’s strategies

•        Loyalties and motivations for improvements

Intellectual Knowledge-based intangibles providing competitive advantage:

•        Patents, copyrights, software, rights and licences

•        Tacit knowledge, systems and protocols

Natural Input to goods and services and what activities impact:

•        Water, land, minerals and forests

•        Biodiversity and ecosystem health

Social and relationship Institutions and relationships within each community stakeholder group and network to enhance wellbeing:

•        Common values and behaviour

•        Key relationships

•        Brand and reputation

•        Social licence to operate

4.10.2 Guiding principles

A number of guiding principles underpin the content and presentation of an integrated report.

Strategic focus and future orientation Insights into strategy, and how it relates to organisation’s ability to create value in the short, medium and long term, and how it affects the capitals
Connectivity of information  A holistic view of the combination, interrelatedness and dependencies between the factors that affect the ability to create value over time
Stakeholder relationships The nature and quality of relationships with key stakeholders and how their legitimate needs and interests are taken into account
Materiality, conciseness, reliability and completeness Provision of important and reliable information including all material items, both positive and negative, in a concise manner
Consistency and comparability Consistent over time and comparable with other organisations


4.10.3 Content elements

The content elements follow on from the guiding principles.

  • Organisational overview and external environment
  • Governance
  • Business model
  • Risks and opportunities
  • Strategy and resource allocation
  • Performance
  • Outlook
  • Basis of presentation

4.10.4 Benefits of integrated reporting

The following are potential benefits of integrated reporting.

  • Stakeholder needs   

The information will be more in line with investor and other stakeholder requirements, leading to a higher level of trust from, and engagement with, stakeholders. Investors will have better information to assess ability to generate cash flows and risk opportunities. The connections made in reporting will enable investors to assess better the combined impact of the diverse factors affecting the business. This should result in better investment decisions and more effective capital allocation.

  • Decision-making

Having the information will enable better resource allocation decisions, enhanced risk management and better identification of opportunities.

  • Reputation

Greater transparency should result in a decrease in reputation risk and lower cost of, and better access to, capital.

  • Harmonisation

Integrated reporting provides a platform for standard-setters and decision-makers to harmonise reporting.

  • Stewardship

Because of its emphasis on resources and relationships and a longer timeframe, organisations are better placed to act, and be more accountable, as stewards of common resources.    

  • Stakeholder relationships

The emphasis on stakeholder engagement should lead to greater consultation with stakeholder groups and dealing with their concerns.

4.10.5 Challenges to integrated reporting

There are a number of challenges to the development of integrated reporting.

  • Local regulation

Regulations that vary between jurisdictions currently affect components of integrated reporting and progress towards integrated reporting will happen at different speeds in different countries.

  • Directors’ duties

Directors’ duties also vary between jurisdictions. Integrated reporting will be influenced by the users of accounts whom the directors are required to address.

  • Directors’ liability

Concerns about liability will need to be addressed, as directors will be reporting on the future and on evolving issues.

  • Confidentiality

Organisations will need to balance the benefits of integrated reporting with the desire to avoid disclosing competitive information.

  • Incentives

Integrated reporting needs to assist in overcoming focus on short-term rewards.      

Exam focus point A question in the Pilot Paper asked for an explanation of the importance of environmental reporting.

5 Environmental management systems  12/11

FAST FORWARD            ISO statements provide a framework for an environmental management system including a policy statement, assessment, functions and reporting.



How do the main elements of control systems for environmental management systems differ from control systems in other areas?



As we shall see in this section, they don’t. Environmental management systems are a good illustration of how control systems work in practice.


5.1 EMAS

The European Union’s Eco-Management and Audit Scheme (EMAS) was adopted in 1993 as a voluntary scheme. Its emphasis is on targets and improvements, on-site inspections and requirements for disclosure and verification. The insistence on targets means that organisations that subscribe to it cannot just rely on monitoring. They have to improve their environmental performance.

The disclosure and verification requirements are seen as essential, as companies need to know that their performance will be subject to public scrutiny based on data that has been reliably audited, to become ‘good little goldfish’ (Elkington). Disclosure means that companies have to address the very real difficulties and conflicts of interest that arise in weighing up the need to maximise profits against the need to comply with disclosure requirements. However, many businesses were opposed to the requirement of EMAS and lobbying meant that compliance was introduced as voluntary rather than compulsory as was originally intended.

EMAS’s adoption has been rather more extensive in Germany than elsewhere in the European Union. However, many companies that had felt that the requirements of EMAS were excessive eventually had to respond to pressures regarding their environmental performance and adopt a recognised standard (ISO 14000).

5.1.1 Requirements for EMAS registration

  • An environmental policy containing commitments to comply with legislation and achieve continuous environmental performance improvement
  • An on-site environmental review
  • An environmental management system that is based on the environmental review and the company’s environmental policy
  • Environmental audits at sites at least every three years
  • Audit results to form the basis of setting environmental objectives and the revision of the environmental policy to achieve those objectives
  • A public environmental statement validated by accredited environmental verifiers containing detailed disclosures about policy, management systems and performance in such areas as pollution, waste, raw material usage, energy, water and noise
5.2 ISO 14000

ISO 14000 was first published in 1996 and based on earlier quality management standards. It provides a general framework on which a number of specific standards have been based (the ISO family of standards). ISO 14001 prescribes that an environmental management system must comprise:

  • An environmental policy statement
  • An assessment of environmental aspects and legal and voluntary obligations
  • A management system
  • Internal audits and reports to senior management
  • A public declaration that ISO 14001 is being complied with

Critics of ISO 14000 claim that its emphasis on management systems rather than performance is misplaced, and that it is much less effective because it does not include EMAS’s rigorous verification and disclosure requirements.

5.3 Environmental policy statement

The policy statement should be the basis for future action. It therefore needs to be based on reliable data and allow for the development of specific targets.

Organisations may wish to develop their own in-house policy statement or adopt one of the public charters such as the CERES principles (see below) or the ICC’s Charter for Sustained Development. An in-house charter can be tailored to the organisation’s needs and be compatible with the mission statement in other areas. However, it may be viewed by outsiders as too general and bland, and also may not be internationally comparable. Adopting internationally recognised standards means adherence to standards that have been determined objectively, and assisting stakeholders by enabling comparison with other organisations that have adopted the same standards.



The Coalition for Environmentally Responsible Economics, CERES, created the CERES principles in 1989. The principles are a code of environmental conduct to be publicly endorsed by companies as an environmental mission statement or ethic.

  • Protection of the biosphere – aiming to eliminate the release of any substance that may cause environmental damage, safeguarding habitats and protecting biodiversity
  • Sustainable use of natural resources – making sustainable use of renewable natural resources and conserving non-renewable natural resources through efficient use and careful planning
  • Reduction and disposal of waste – elimination of waste where possible through source reduction and recycling, and disposal where necessary of waste through safe and responsible methods
  • Energy conservation – conserving energy, improving energy efficiency of internal operations, goods and services and making every effort to use environmentally safe and sustainable energy sources
  • Reduction in environmental and health and safety risks through safe technologies, facilities and operating procedures, and being prepared for emergencies
  • Safe products and services – elimination where possible of products and services that cause environmental damage or health and safety hazards, together with informing customers of environmental impacts
  • Environmental restoration – correcting conditions caused by the organisation that have resulted in damage to the environment and aiming to redress injuries
  • Informing the public of conditions that might endanger health and safety and the environment, regular dialogue with nearby communities and not taking any action against whistleblowing employees who report dangerous incidents or conditions
  • Management commitment – environmental commitment being a factor in the selection of directors, board kept informed about environmental issues and acknowledgement of board responsibility for environmental issues
  • Audits and reports – annual self-evaluation of progress in implementing principles, support for the timely creation of generally accepted environmental audit principles – and annual endorsement of the CERES principles


5.4 Management roles

Whatever the standards adopted, they must be promoted by a member of the senior management team for the standards to be effective, and the audit committee is likely to be involved in monitoring and reporting on environmental compliance. Depending on the size of the organisation and its impact on the external environment, an environmental manager or an environmental management department may be employed.

5.5 Assessment of environmental aspects and obligations

Many companies have been forced to act on environmental issues because of shocks such as environmental disasters or attention from pressure groups. To reduce the chances of these happening, organisations must not only monitor their internal performance but also include within their monitoring of the external situation an assessment of the impact of environmental issues. It will be particularly important to monitor:

  • Emerging environmental issues
  • Likely changes in legislation
  • Changes in industry best practice
  • Attitudes of suppliers, customers, media and the general public
  • Activities of environmental enforcement agencies
  • Activities of environmental pressure groups
5.6 Management systems

In Accounting for the Environment Gray and Bebbington listed the functions that environmental management systems should cover.

Environmental review and policy development A first review of environmental impacts of materials, issues and products and of business issues arising, also the development of a tailored in-house policy or measures to ensure adherence to external standards
Objectives and target development As with all business objectives and targets, it is preferable that those set be unambiguous and achievable. Initiatives such as the WWF initiative described above encourage quantified targets within a specified time period eg reducing carbon dioxide emissions by X% within a specified time period
Life-cycle assessment This aims to identify all interactions between a product and its environment during its lifetime, including energy and material usage and environmental releases.

•      Raw materials used have to be traced back to the biosphere and the company recognise impact on habitat, gas balance, the energy used in the extraction and transportation and the energy used to produce the means of extraction

•      For intermediate stages, emissions, discharges and co-products

•      At the consumer purchase stage, the impact of manufacture and disposal of packaging, transport to shops and ultimately impacts of consumers using and disposing of the product

Establishment and maintenance of environmental management systems Key features of environmental management systems (as with other management systems) including information systems, budgeting, forecasting and management accounting systems, structure of responsibilities, establishment of an environmentally friendly culture, considering impact on human resource issues such as education and performance appraisal
Regulatory compliance Making sure that current legal requirements are being fulfilled and keeping up to date with practical implications of likely changes in legislation
Environmental impact assessment A regular review of interactions with the environment, the degree of impact and an environmental SWOT analysis, also the impact of forthcoming major investments
Eco-label applications Eco-labelling allows organisations to identify publicly products and services that meet the highest environmental standards. To be awarded an eco-label requires the product to be the result of a reliable quality management system
Waste minimisation Whether waste can be minimised (or, better still, eliminated), possibility of recycling or selling waste
Pollution prevention programmes Deciding what to target
Research, development and investment in cleaner technologies How to bring desirable features into product development, bearing in mind product development may take several years, and opinion and legal requirements may change during that period. Desirable features may include minimum resource usage, waste, emissions, packaging and transport, recycling, disassembly and longer product life
Environmental performance and issues reporting Consideration of the benefits and costs of reporting, how to report and what to include (policies, plans, financial data, activities undertaken, sustainability)
5.7 Environmental reporting

Predictably the main arguments in favour of environmental reporting are similar to those for reporting on other aspects of internal control, including following the principles of transparency and openness, disclosing matters of concern to investors and other stakeholders and generally presenting a balanced and understandable assessment of the company’s position and prospects.

5.8 Advantages of environmental management systems

Operating an environmental management system can have the following benefits.

  • Control of impacts

Operating a system should result in a structured approach to controlling impacts and ensuring compliance with laws and regulations.

  • Limiting costs and resource usage

The system should ensure reduced costs in such areas as waste management and resource inputs, as resources are used more efficiently.

  • Reputation

Commitment to a system should demonstrate to stakeholders the organisation’s commitment to environmental responsibility. It can result in reduced pressure from active stakeholders, such as government, regulators or pressure groups.

Question 1 in December 2011 asked about reporting on environmental risk management systems.

Exam focus point

6 Social and environmental audits

Social and environmental audits are designed to ascertain whether the organisation is complying with codes of best practice or internal guidelines, and is fulfilling the wider requirements of being a good corporate citizen.

6.1 Social audits

The process of checking whether an organisation has achieved set targets may fall within a social audit that a company carries out. Social audits may cover sustainable use of resources, health and safety compliance, labour conditions (no exploitation of labour) and equal opportunities.

General social audits will involve:

  • Establishing whether the organisation has a rationale for engaging in socially responsible activity, such as community support or enlightened treatment of employees
  • Identifying that all current environment programmes are congruent with the mission of the company
  • Assessing objectives and priorities related to these programmes
  • Evaluating company involvement in such programmes past, present and future

Whether or not a social audit is used depends on the degree to which social responsibility is part of the corporate philosophy. A cultural awareness must be achieved within an organisation in order to implement social policy, which requires board and staff support.

6.1.1 Specific social audits

Specific social audits may cover the consequences of a major decision; for example, costs such as unemployment costs and indirect redundancies of shutting a major manufacturing plant.

6.1.2 External social audits

Another type of social audit is an audit carried out by an external body with or without the organisation’s co-operation. These types of audit might for example cover involvement in controversial areas such as animal testing, aggressive marketing, low-wage employment overseas and investment in countries governed by oppressive regimes. More positive areas that could be covered include industrial democracy, equal opportunities, community involvement and disclosure of information.

                                 6.2 Environmental audits                                         12/10, 6/14
An environmental audit is a systematic, documented, periodic and objective evaluation of how well an entity and its management and equipment are performing, with the aim of helping to safeguard the

environment by facilitating management control of environmental practices and assessing compliance with entity policies and external regulations.

Environmental auditing is also used for auditing the truth and fairness of an environmental report rather than the organisation itself. The same is true of social auditing.

Key term

An environmental audit might be undertaken as part of obtaining or maintaining the BSI’s ISO 14001 standard.

It may also be undertaken as a result of various pressures:

  • As environmental issues are a source of risk due to unforeseen liabilities or reputation damage, an environmental audit may be organised as part of the risk audit.
  • Potential stakeholders (customers, employees) may decide whether to engage with the organisation on the basis of its environmental records.
  • Potential investors may be influenced by social and environmental factors when making investment decisions.

In practice environmental audits may cover a number of different areas, and some of the examples below may go beyond what you have encountered in your earlier auditing studies. The scope of the audit must be determined and this will depend on each individual organisation. Often the audit will be a general review of the organisation’s environmental policy. On other occasions the audit will focus on specific aspects of environmental performance (waste disposal, emissions, water management, energy consumption) or particular locations, activities or processes.

There are other specific aspects of the approach to environmental auditing which are worth mentioning.

  • Environmental Impact Assessments (EIAs)

These are required, under an EU directive, for all major projects which require planning permission and have a material effect on the environment. The EIA process can be incorporated into any environmental auditing strategy.

  • Environmental surveys

These are a good way of starting the audit process, by looking at the organisation as a whole in environmental terms. This helps to identify areas for further development, problems, potential hazards and so forth.

  • Environmental SWOT analysis

A ‘strengths, weaknesses, opportunities, threats’ analysis is useful as the environmental audit strategy is being developed. This can only be done later in the process, when the organisation has been examined in much more detail.

  • Environmental Quality Management (EQM)

This is seen as part of TQM (Total Quality Management) and it should be built into an environmental management system. Such a strategy has been adopted by companies such as IBM, Dow Chemicals and by the Rhone-Poulenc Environmental Index which has indices for levels of water, air and other waste products.

  • Eco-audit

The European Commission has adopted a proposal for a regulation for a voluntary community environmental auditing scheme, known as the eco-audit scheme. The scheme aims to promote improvements in company environmental performance and to provide the public with information about these improvements. Once registered, a company will have to comply with certain ongoing obligations involving disclosure and audit.

  • Eco-labelling

Developed in Germany, this voluntary scheme will indicate those EU products which meet the highest environmental standards, probably as the result of an EQM system. It is suggested that eco-audit must come before an eco-label can be given.

  • BS 7750 Environmental Management Systems

BS 7750 also ties in with eco-audits and eco-labelling and with the quality BSI standard BS 5750. Achieving BS 7750 is likely to be a first step in the eco-audit process.

  • Supplier audits

They ensure that goods and services bought in by an organisation meet the standards applied by that organisation.

6.2.1 Environmental audit stages

There are three main stages in most environmental audits.

  • Establishing the metrics

The greater the variety of metrics, the more information provided. However, measuring against a number of metrics could result in a costly audit.

  • Measuring planned or desirable performance against actual performance

This is an important aspect of a system, as we discussed in Chapter 4. Some metrics will be objective; for example, the level of carbon emissions or plastic bag issues can be measured. However other aspects, for example public perceptions, cannot be measured objectively and may therefore be difficult to measure precisely.

  • Reporting the results of the audit

Important decisions will include the form that the report should take and how widely it should be distributed, in particular whether the organisation’s annual report should include a report by the auditors.

6.2.2 Auditor concerns
  • Board and management having good understanding of the environmental impact and related legislation of the organisation’s activities in areas such as buildings, transport, products, packaging and waste
  • Adoption and communication of adequate policies and procedures to ensure compliance with relevant standards and laws
  • Adoption of appropriate environmental information systems
  • Adoption and review of progress against quantifiable targets
  • Assessment of whether progress is being made economically and efficiently
  • Implementation of previous recommendations of improvements to processes or systems
  • True, fair and complete reporting of environmental activities
6.2.3 Auditing environmental policy

Auditing the appropriateness of, and compliance with, the organisation’s environmental policy will be at the heart of internal environmental audits.

  • Review evidence of the organisation’s environmental interactions.
  • Obtain a copy of the organisation’s environmental policy and targets and assess whether the policy is likely to achieve objectives:
    • Meet legal requirements
    • Meet environmental standards
    • Satisfy key customers/suppliers’ criteria
  • Test implementation and adherence to the targets set out in the policy by:
    • Discussion
    • Observation
    • ‘Walk-though tests’ where possible
    •         Report on the level of compliance or variance.

The targets measured in the audit may include:

  • Measures of emissions (pollution, waste and greenhouse gases)
  • Consumption (energy, water and non-renewable food stocks)

Often a target will be set for reduction in aspects of the organisation’s environmental footprint, possibly the footprint attributable to each unit of output.

The value of the audit may be questioned, as for most companies an environmental audit is not compulsory, there are no mandatory audit standards and no compulsory auditable activities. Unless one of the international frameworks such as ISO 14000 is used, stakeholders may question how rigorous the process has been. Also in some instances the audit will be for internal use only, although an audit report may be part of external environmental reporting.



What are the key elements in ensuring effective social and environmental reporting?



The answer brings together several themes that we have discussed in earlier chapters.

  • Shareholders and other stakeholders should have input into the process.
  • Use of external benchmarks and external, independent verifiers to report on the quality of the information provided enhances credibility.
  • The information reported must be supported by effective control and information systems.
  • Information must be clear, complete and unbiased, fairly reporting on negative aspects as well as positive.
  • Information reported must be seen by the organisation as feedback that forms the basis of continuous improvement in these areas.



Dale Vince, founder and managing director of Ecotricity (described as the UK’s first green electricity company) was asked by The Guardian newspaper to comment on the UK television series, The Apprentice. In particular he was asked about the aggressive competition between the contestants, who were vying to be employed by business magnate Lord Sugar.

Vince said successful businesses can incorporate idealism, fairness and a concern for the environment. ‘I believe in sustainable relationships where everybody is willing to do business again. They like each other because they haven’t been screwed to the floor.’

Do you agree with Vince’s comments? What are your reasons for your views on them?


Your answer should have demonstrated where you stand, for example, in the Gray, Owen and Adams spectrum. Hopefully you will have been inspired by the ideas we have discussed in this chapter. A key feature of Vince’s argument which hopefully you picked up on was that sustainability is not just about environmental issues – it influences a business’s whole way of operating. It is therefore an integral part of the internal environment.


Chapter Roundup

Corporate citizenship has been used to describe how an organisation’s values are shaped and the impact that concepts of responsibility have on business decision-making.
An organisation’s ethical stance relates to how it views its responsibilities to shareholders, stakeholders, society and the environment.
There is increasing concern about businesses’ relationship with the natural environment. Businesses may suffer significant costs and a loss of reputation if problems arise.


Sustainability means limiting use of resources to what can be replenished.

The Global Reporting Initiative provides a framework for a sustainability report.

Full cost accounting is a method of accounting for all relevant costs including externalities.

ISO statements provide a framework for an environmental management system including a policy statement, assessment, functions and reporting.
Social and environmental audits are designed to ascertain whether the organisation is complying with codes of best practice or internal guidelines, and is fulfilling the wider requirements of being a good corporate citizen.



Quick Quiz

  • Fill in the blank:

…………………………………. is the business strategy that shapes the values underpinning a company’s mission and the choices made each day by its executives, managers and employees as they engage with society.

  • Match the position on social responsibility with the viewpoint held.
    • Pristine capitalist
    • Expedient
    • Social contract proponent
    • Social ecologist
    • Socialist
    • Radical feminist
    • Deep ecologist
      • Economic systems that trade off threats to the existence of species with economic imperatives are flawed.
      • Businesses have to accept some social legislation and moral requirements if they are to be able to generate profits.
      • Companies exist to make profits and seek economic efficiency.
      • The economic framework should change from being one that promotes materialism to one that promotes equality.
      • Economic processes that result in resource exhaustion, waste and pollution must be modified.
      • Economic systems emphasise aggression, conflict and competition rather than co-operation and reflection.
      • An organisation’s survival and prosperity is based on delivery of benefits to society in general.
    • Fill in the blank:

…………………………………. is the impact that a business’s activities have on the environment including its resource environment and pollution emissions.

  • What is sustainability in relation to a company’s activities?
  • Give three examples of the environmental indicators mentioned in the Global Reporting Initiative.
  • Fill in the blank:

…………………………………. is a system that allows current accounting and economic numbers to incorporate all potential/actual costs and benefits into the accounting equation, including environmental and social externalities.

  • What are the main elements of an environmental management system per ISO 14001?
  • By what criteria is an auditor likely to test an organisation’s environmental policy?

Answers to Quick Quiz

  • Corporate citizenship
  • (a) (iii) (b) (ii) (c) (vii) (d) (v) (e) (iv) (f) (vi) (g) (i)
  • Environmental footprint
  • Sustainability involves developing strategies so that the company only uses resources at a rate that allows them to be replenished (in order to ensure that they will continue to be available). At the same time the company’s emissions of waste are confined to levels that do not exceed the capacity of the environment to absorb them.
  • Three from:
    • Materials
    • Energy
    • Water
    • Biodiversity
    • Emissions, effluents and waste
    • Suppliers
    • Products and services
    • Compliance
    • Transport
    • Overall
  • Full cost accounting
  •  An environmental policy
    • An assessment of environmental aspects and legal and voluntary obligations
    • A management system
    • Internal audits and reports to senior management
    • A public declaration that ISO 14001 is being complied with
  •  Meet legal requirements
    • Meet environmental standards
    • Satisfy key customers’/suppliers’ criteria



Number Level Marks Time
Q11 Examination 25 49 mins





(Visited 140 times, 1 visits today)
Share this: