CHAPTER 7
Corruption and Ethics in Global Business
Chapter Outline
• Introduction
• What Is Ethics?
• Ethics in Business and Society
o Ethics and Economics
o The Corruption Perceptions Index and Transparency International
• What Is Corporate Social Responsibility?
o Rules, Policies, and Guidelines
o Ethics Codes at Selected Companies
• Financial Scandals
o Enron
o WorldCom
o Vivendi
o Parmalat
o Other Financial Scandals
• Can Ethics Be Taught?
• Internal Controls
o Foreign Corrupt Practices Act
o Computer Security of Accounting Information
Teaching Objectives
After covering this chapter, the student should be able to:
• Explain briefly the meaning of ethics.
• Describe how ethics and economic progress are connected.
• Describe briefly the function of corporate social responsibility.
• Recount the events in some of the more famous corporate financial scandals.
• Explain how ethics can be taught.
• Explain how internal controls can facilitate ethical behavior and help prevent financial
impropriety.
COMPREHENSIVE LECTURE OUTLINE
I. Introduction. Ethics refer to the guidelines by which people relate to the world, such
as how they conduct business, treat others, and care about the environment. Three
philosophical principles regarding ethics include:
• Imperative Principle: Do what is right.
• Utilitarian Principle: Do what produces the greatest good.
• Generalization Argument: Do what is right, but filter the action by
consideration of the consequences.
CLASS ACTIVITY: Use the Cultural Perspective case as an opportunity to allow students to
explore the impact of reminding people of a moral benchmark on their behavior.
II. What Is Ethics? Ethics can be defined as the branch of philosophy that addresses the
values pertaining to human behavior, with specific regard to the “rightness” and
“wrongness” of actions and to the “goodness” and “badness” of the intent of such
actions.
• Integrity can be defined as adherence to moral and ethical principles, soundness of
moral character, and honesty. The person’s integrity has two essential characteristics:
o One must have knowledge about what morally constitutes the right thing to
do.
o One must have the courage to do what is right.
• There are four basic steps in ethical decision-making. Exhibit 7.1 • Basic Steps in
Ethical Decision-Making:
o Define all the facts and circumstances.
o Identify the people affected.
o Determine the alternative decisions and consequences.
o Make the decision, by determining the right action and carrying out the right
action
• In the business world, the purpose of ethics is to direct businessmen and -women to
abide by a code of conduct that facilitates and encourages public confidence in their
products and services. Many companies have ethics codes to guide their employees.
In addition, business and accounting organizations recognize their professional
responsibilities by providing ethical guidelines to their members. Exhibit 7.2 • The
BBB Code of Business Practices.
DISCUSSION STARTER: REALITY CHECK 1.
Search the Internet for articles on business ethics. Look for guidance on how to conduct
business. Some people cynically say that business ethics is an oxymoron. Why do people make
that statement?
III. Ethics in Business and Society. Ethics and economic progress are tightly intertwined.
For business activity to occur, trust is essential. Adam Smith considered economics a branch of
ethics. Business activity would grind to a halt without trust, fair dealings, and honest
communication.
• Ethics and Economics. Unethical behavior will ultimately destroy a company’s
ability to make money. While a goal of any company should be to increase its
owners’ wealth, to do so requires the public’s trust. In the long term, trust depends
upon ethical business practices. When a society’s ethical values begin to
deteriorate, people often look to government for help. Government has limited
ability to maintain a society when ethical values are collapsing. In such a society
laws and regulations will be circumvented and economic activity will be
unsustainable.
• The Corruption Perceptions Index and Transparency International. Each
year the advocacy organization Transparency International publishes the
Corruption Perceptions Index (CPI), which provides a measurement of the
potential corruption risk per country. The CPI ranks most of the world’s countries
by their perceived levels of corruption, as determined by expert assessments and
opinion surveys.
• Violations of laws such as the Foreign Corrupt Practices Act (FCPA) are more
likely in countries with high corruption risk. Exhibit 7.3 • FCPA Violations and
Corruption Perceptions Index for Selected Countries.
o Yet, a low-risk country does not guarantee that there will be no corruption.
Risk assessment should be thorough and focused upon operations in high-
risk countries, without ignoring low-risk countries.
DISCUSSION STARTER: REALITY CHECK 2.
Have you ever done business with someone you did not entirely trust, or who did not trust
you? Describe your experience. How would the transaction have been different if trust was
present?
III. What Is Corporate Social Responsibility? Corporate Social Responsibility (CSR)
refers to a company’s obligations to society, including the welfare of a wide range of
stakeholders: people and places affected by company activities. CSR mandates that a
company strive to:
o Provide a quality product or service to customers
o Provide an appropriate return on investment to shareholders
o Treat employees with dignity and respect
o Take care of the environment
o Meet legal obligations
o Fairly deal with suppliers, lenders, and other business parties
▪ Rules, Policies, and Guidelines. Following legal rules is a starting point for making
an ethical choice. A second way to resolve an ethical question is to apply the formal
policies of the company or professional organization. A third way to make an ethical
choice is to follow informal guidelines such as moral intuition. Two principles that
can help when making an ethical decision are the principle of consistency and the
principle of respect. To apply the principle of consistency, ask: “What if everyone
did it?” To apply the principle of respect, one must make a choice that treats people
with the greatest respect.
• Ethics Codes at Selected Companies. Many companies have established a corporate
ethics code. Exhibit 7.4 • Steps to Ensure Integrity at ExxonMobil. Well-designed
corporate ethics codes, which are monitored and enforced by top management
personnel, will help employees to do the right thing in difficult circumstances.
ECONOMIC PERSPECTIVES: Walmart Canada’s Environmental Stewardship. Use the
Economic Perspectives case as an opportunity to discuss the impact of good corporate social
responsibility on the reputation and business success of a company.
Suggestion: You could ask students to do this case as individuals or in teams as a class activity.
Have the students read the case presented in the text and answer the questions at the end of the
case.
Questions:
1. Is Walmart Canada taking care of the environment? Do you think Walmart’s customers
care if the company is a good corporate citizen? Answer: Walmart Canada’s goals
2. Do you think it is appropriate for industry organizations such as the Retail Council of
Canada to give awards for corporate social responsibility? Do you think awards like
these motivate companies to act more responsibly? Answer: Industry organizations and
DISCUSSION STARTER: REALITY CHECK 3.
Do corporate stockholders have a right to expect that the companies in which they invest will
act in the best interests of people within and outside the business, the communities where the
business operates, and the environment? Or should these concerns be bypassed if the
corporation finds it necessary to do so to achieve a reasonable return on investment?
V. Financial Scandals. Corporate financial scandals are nothing new; they are as old as
corporations. Recent scandals have often led to investors’ loss of confidence in the stock market
and in the reliability of corporate financial reports. In some countries, the federal legislatures
have enacted new laws concerning fraud and corporate financial reporting. Some of the most
infamous corporate financial scandals of recent times include:
• Enron. The Enron scandal caused people to question the reliability of the financial
reporting practices of publicly traded corporations. Enron was a key event leading the
U.S. Congress to pass a new federal securities law, the Sarbanes Oxley Act of 2002.
Before its collapse, Enron was a highly regarded energy company located in Houston.
Enron abused an accounting practice known as mark to market accounting. Mark to
market accounting generally refers to accounting practices that update the value of an
asset to its current market levels.
• WorldCom. From 1999 to 2002 WorldCom, located in Hattiesburg, Mississippi, had
manipulated earnings by using fraudulent accounting methods, thereby presenting a false
image of economic growth and prosperity.
• Vivendi. A French-based multinational corporation, operating in music, television, film,
publishing, etc. Between October 2000 and April 2002, the company cooked its books to
make its financial performance appear better than it was for the purpose of making a
number of acquisitions.
• Parmalat. An Italian-based multinational corporation entered into world financial
markets financing several international acquisitions with debt. However, by 2001 a
number of the new operations were losing money. The company began extensively using
derivatives for financing. This facilitated efforts to disguise the extent of the company’s
financial liabilities and losses.
• Other Financial Scandals. Financial scandals have occurred throughout history in all
countries in the world. Sometimes the name of the person committing the fraud becomes
so notorious that the fraudster’s name identifies that type of fraud. Such is the case of
Charles Ponzi, who committed one of the most infamous frauds of all time. He tricked
thousands of New England residents into investing in a postage stamp speculation
scheme during the 1920s. Ponzi was swamped with money from investors, as he
guaranteed a 40% return in three months. Ponzi achieved this remarkable rate of return
by using money received from later investors to provide early investors with returns. This
type of fraud is referred to as a pyramid scheme or Ponzi scheme. Between the early
1990s and 2008 money manager Bernard Madoff perpetrated a Ponzi scheme amounting
to an estimated $65 billion.
DISCUSSION STARTER: REALITY CHECK 4.
Unethical people who try to gain your confidence are called “con” men. Charles Ponzi is
among the most infamous con men. Have you ever been tempted by an offer that seemed too
good to be true? Was it?
VI. Can Ethics Be Taught? Academic research shows that ethics classes affect people’s
actions in a positive manner. Teaching ethics will have at least some impact upon the ethical
perspectives and behavior of those being taught. The following are the five fundamentals of
ethics education:
• Personal integrity
• Responsibility of business in society
• Ethical decision-making
• Ethical leadership
• Corporate governance
ETHICAL PERSPECTIVES: Human Trafficking. Use the Ethical Perspectives case as an
opportunity to discuss the importance of one individual making a difference and fighting against
human trafficking.
Questions:
1. On what other matters might Wilberforce have spent his time and energy, rather than on
ending slavery? How much effort should a politician or any person spend, in
Wilberforce’s day or the present, to advance a noble cause? Answer: Wilberforce could
2. Can one person still make a difference in politics? Answer: Wilberforce’s example
3. Can history be repeated and the global slave trade be stopped once again? Answer:
• Measuring success by accumulation of wealth and power is foolish. Exhibit 7.5 • How
Do You Measure Success? Many people have made observations about ethics and
personal integrity over the years. Exhibit 7.6 • Ethics in Business and Society: Selected
Quotations.
DISCUSSION STARTER: REALITY CHECK 5.
Most people begin learning about ethics at an early age. What is one of the first lessons you
learned about ethical behavior?
VI. Internal Controls. Internal controls comprise a system of rules and procedures
designed to ensure the accuracy and reliability of financial and accounting information. Today
the dominant form of business is the corporation, in which the owners rely upon professional
managers to operate the firm. Managers rely upon the accounting information system to supply
them with the financial information they need to make effective decisions. Internal control
procedures fit into two categories:
• Preventive: Preventing accidental errors and intentional misrepresentations from
occurring
• Feedback: Identifying errors and irregularities after they occur so that corrective action
may be taken
Both categories are essential to a company’s control structure.
• Foreign Corrupt Practices Act. The Foreign Corrupt Practices Act has been garnering
more attention as corporations are under increased scrutiny. The FCPA was passed in
1977 in response to corruption and bribery of foreign government officials by managers
of U.S. companies. The FCPA consists of two parts: an anti-bribery provision and a
requirement to maintain an adequate internal control system over financial books and
records. The FCPA is a U.S.-based law, it is enforced on U.S.-based companies, and it
does not apply to foreign companies. While more than 30 countries have enacted laws
comparable to the FCPA, many are not as aggressively enforced.
• New regulatory measures include the Sarbanes-Oxley Act (SOX) enacted in 2002. SOX
established new and more rigorous standards for corporate boards of directors,
management, and accounting firms. SOX requires that the CEO and CFO of a publicly
traded corporation must certify in each periodic report containing financial statements
that the report fully complies with the Securities Exchange Act of 1934 and that the
information fairly presents the company’s financial condition. As a result of the FCPA
and SOX some people might have anticipated that strong corporate governance would be
implemented and that companies would become models of corporate social
responsibility.
• Computer Security of Accounting Information. Advances in technology have
revolutionized business and other aspects of society. However, e-business did not become
commonplace until the development of the World Wide Web in the 1990s. Technology
facilitates business activities, but there are some downsides. A computer crime involves
the use of computers to perpetrate or facilitate illegal activity. Increased use of computers
to maintain financial records has led to more opportunities for computer crime. The five
basic threats to security are:
o Natural disasters
o Dishonest employees
o Disgruntled employees
o Persons external to the organization
o Accidental errors and omissions
Accidental errors and omissions cause the great majority of the problems concerning
computer security. Errors and omissions are especially prevalent in systems of sloppy
design, implementation, and operation.
DISCUSSION STARTER: REALITY CHECK 6.
Preventive controls can keep a worker from being tempted to do wrong. While an individual is
ultimately personally responsible for his or her own behavior, isn’t it better for a company to
set up controls that help people do what’s right? How could such controls be created and
implemented?
Assignments
End-of-Chapter Discussion Questions
1. What do you consider the key characteristics of a person of integrity?
2. Why is the ethical character of people so important to business and society?
3. How does corporate social responsibility contribute to successful business
4. Briefly describe the financial scandals at Enron, WorldCom, Vivendi, and
Parmalat; what other scandals have happened in recent years or months?
5. How can ethics be taught? Answer: Ethics classes affect people’s actions in
6. Why are internal controls important to successful company operations?
Mini-Case Synopsis and Questions
For nearly 40 years, ExxonMobil has promoted business ethics and integrity
through a 12–page booklet titled “Standards of Business Conduct.” ExxonMobil
regards a well-founded reputation for scrupulous dealing as a valuable company
asset.
Questions:
1. Why is ethics important to doing business? Business activity would grind to
2. If all companies established a corporate ethics code, would that eliminate
company financial scandals? Why or why not? Corporate ethics codes
Point/Counterpoint, Interpreting Global Business News, and Portfolio Projects
Students’ answers to these assignments will vary widely. Their writing should
reflect an understanding of the chapter’s basic concept, thorough research, and
logic and critical thinking skills.