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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Chapter 7Corruption and Ethics in

Global Business

Introduction to Global Business


1. Explain briefly the meaning of ethics.2. Describe how ethics and economic progress are

connected.3. Describe briefly the function of corporate social

responsibility (CSR).4. Recount the events in some of the more famous

corporate financial scandals.5. Explain how ethics can be taught.6. Explain how internal controls can facilitate ethical

behavior and help prevent financial impropriety.

After studying this chapter, you should be able to:


Philosophical Principles of Ethics

Imperative Principle

• Do what is right.

Generalization Argument

• Do what is right, but filter action by considering consequences.

Utilitarian Principle

• Do what produces the greatest good.


What Is Ethics?

• Ethics– The branch of philosophy that addresses the values pertaining to

human behavior, with regard to the “rightness” and “wrongness” of actions and to the “goodness” and “badness” of the intent and results of such actions

• Integrity– Adherence to moral and ethical principles; soundness of moral

character; honesty. As a practical matter, a person of integrity knows what is right and has the courage to do it.


EXHIBIT 7.1 BASIC STEPS IN ETHICAL DECISION MAKING

1. Define all the facts and circumstances, including who, what, where, when, and how.

2. Identify the people affected by the situation and their rights and obligations.

3. Identify the alternative decisions and consequences.

4. Make the decision: determine the right thing to do and then do it.


Ethics in Business and Society

• For ethical business activity to occur, mutual trust, fair dealings, and honest communication are essential.

• Ethics and economics– Unethical behavior (e.g., inside information) destroys fair

investment markets.– Commonly-shared positive ethical values regarding respect for

individuals, their lives, their property, and their freedoms promote individual integrity and doing the “right thing.”

• Corruption Perceptions Index (CPI) is published each year by Transparency International, providing metrics to the potential corruption risk for most of the world’s countries.


What Is Corporate Social Responsibility?

• Corporate social responsibility (CSR)– A company’s obligations to society, including the welfare of people

and places affected by company activities• CSR mandates that a company should try to:

– Provide quality products or services– Provide an appropriate return on investment to the company’s

stockholders– Treat its employees with dignity and respect– Take care of the environment– Meet its legal obligations– Deal fairly with suppliers, lenders, and other business parties


Rules, Policies, and Guidelines

• Making an ethical choice:– Follow legal rules– Apply the formal ethical policies of your organization– Use your moral intuition to answer the following:

• What would your mother or father say if you acted in that way?• How would you feel if you saw your situation described in the

newspaper?• Does the situation “smell” bad?• Would you use your behavior as a marketing tool?


Rules, Policies, and Guidelines (continued)

• Two principles that can help you make an ethical decision:– The principle of consistency—considering what would be the

consequences if everyone made the same choice that you are about to make

– The principle of respect—choosing the alternative that treats people with the greatest respect


Financial Scandals: Enron

• Enron Corporation– Was a major global provider of electricity, natural gas, pulp and

paper, and communications services– Used innovative and misleading accounting in “cooking its books”

to avoid disclosing unprofitable operations, including mark to market accounting practices

• The Enron scandal was a key event leading the U.S. Congress to pass a new federal securities law for financial accounting and reporting transparency, the Sarbanes–Oxley Act of 2002, often referred to as SOX.


Financial Scandals: WorldCom

• WorldCom– Used fraudulent accounting methods to manipulate earnings to

present a false image of growth and prosperity to prop up the firm’s stock price

– Underreported “line costs” as assets rather than expensing them and fraudulently overstated revenues

• Internal auditors eventually discovered the fraud and the firm filed for bankruptcy protection which wiped out the investments of stock and bond holders.


Financial Scandals: Vivendi

• Vivendi– Was a French-based multinational corporation with operations in

music, television and film, publishing, telecommunications, the Internet, and video games

– Used fraudulent accounting methods for several years to hide cash flow, liquidity, and financial obligation problems to boost its apparent financial performance to enhance its stock price and make several acquisitions

• The fraud was discovered by the company’s board of directors.– The CEO was required to resign and pay a fine of $1 million.– Vivendi further paid a fine of $50 million.


Financial Scandals: Parmalat

• Parmalat– An Italian-based multinational corporation specializing in dairy and

food products– Used risky derivatives and purchase of its own debt to disguise

losses in several of its new international acquisitions– Was placed under control of a commissioner by the Italian

government after the firm collapsed into bankruptcy when it could not pay of its debt and make its bond payments


Other Financial Scandals

• Other significant financial scandals include:– Teapot Dome scandal

• Resulted from the secret leasing of Teapot Dome oil reserves to a businessman who paid Secretary of the Interior Albert Fall hundreds of thousands of dollars in zero-interest loans

– Ponzi scheme• A fraud in which money received from later investors is used to provide

returns to earlier investors, thus giving an appearance of a profitable investment

• First perpetrated by Charles Ponzi during the 1920s


Can Ethics Be Taught?

Fundamentals of Ethics

Education:

Personal integrity

Responsibility of business in

society

Ethical decision-making

Ethical leadership

Corporate governance


Internal Controls

• Internal controls– A system of rules and procedures designed to ensure the

accuracy and reliability of financial and accounting information• Internal control procedures

– Preventing accidental errors and irregularities (intentional misrepresentations)

– Identifying errors and irregularities for corrective action


Foreign Corrupt Practices Act

• Foreign Corrupt Practices Act (FCPA) of 1997– Applies to U.S. firms and to foreign firms that engage in business

in the United States– Consists of two parts:

• An anti-bribery provision• A requirement to maintain an adequate internal control system over

financial books and records


Foreign Corrupt Practices Act (continued)

• Corporate financial scandals of the early 2000s have led to new regulatory measures, including– Sarbanes–Oxley Act (“SOX”) of 2002

• Increased the prison sentence for fraud to 25 years• Established 20-year sentences for destroying, altering, or fabricating

records in federal investigations, or any scheme to defraud shareholders• Requires that the chief executive officer and chief financial officer of a

publicly traded corporation must certify that its financial statements accurately present the firm’s financial condition and results of the firm’s operations


Computer Security of Accounting Information

• Basic threats to computer security– Natural disasters– Dishonest employees– Disgruntled employees– Persons external to the organization– Accidental errors and omissions


ethicsintegrityCorruption Perceptions

Index (CPI)corporate social

responsibility (CSR)

mark to market accountingPonzi schemeinternal controlsForeign Corrupt Practices

Act (FCPA)

Key Terms

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