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Business ethics

CODES OF ETHICS

Typically, accountancy institutes have a code of ethics, to help guide the behaviour of their members. In recent years, the International Federation of Accountants (IFAC) has created an international code of ethics.

Students need to understand the arguments for and against having such codes, and be able to describe the fundamental principles typically included. Do we need a Code of Ethics?



Advantages

Internal control systems

WHAT IS AN INTERNAL CONTROL SYSTEM?

According to the Turnbull guidance in the UK Combined Code, control systems need to:

  • Safeguard company assets
  • Maintain the efficient running of the business
  • Protect the accuracy of financial reporting information
  • Protect the company from breaking laws and regulations



There are several ways in which control can be achieved in an organisation:

Risk management

THE IMPORTANCE OF RISK MANAGEMENT

Risk, in a business sense, is uncertainty. If uncertainty is not properly managed, then forward planning will be almost impossible, and the risk of business catastrophe will be great. Directors who fail to manage risk are failing in their duty to shareholders.



It is not just that things might go wrong … they may of course go right! If an organisation chooses to take no risk at all, it is likely that its return will not be very high.

Governance in different countries and organisations

UK COMBINED CODE OF BEST PRACTICE

Corporate Governance in the UK is covered by the Combined Code, a document that developed over a number of years. The Code is kept up to date by the UK Financial Reporting Council (FRC).

 

History of the Combined Code

Agency theory and transaction cost theory

AGENCY THEORY REVISITED

Agency relationships are caused when a principal employs someone (the Agent) to do something for them.
The potential problem is that the Agent may not act in the best interests of the principal:

Corporate governance – more detailed areas

THE ROLE OF DIRECTORS

Directors have a fiduciary duty, meaning a position of trust.
Directors could, for example, use their position for personal gain.
Their fiduciary duty is:

  • To disclose all information held.
  • To disclose any personal profits made from their position as director.
  • To disclose any potential conflicts of interest.

Non-executive directors:

A BRIEF HISTORY OF UK COMPANIES (The South Seas Bubble)

  • In the early Eighteenth Century, the South Seas Company was granted exclusive trading rights in the South Seas (South American colonies) in return for helping to finance Government borrowing.
  • To help grow their operations, they looked for investors and issued shares.
  • Things seemed to be going well – more and more investors put money in.
  • There were expensive London offices – it all looked very successful.

A corporation

A corporation, on the other hand, is a business unit chartered by the state and legally separate from its owners (the stockholders). The stockholders, whose ownership is represented by shares of stock, do not directly control the corporation’s operations. Instead, they elect a board of directors to run the corporation for their benefit. In exchange for their limited involvement in the corporation’s operations, stockholders enjoy limited liability; that is, their risk of loss is limited to the amount they paid for their shares.

A partnership

A partnership is like a sole proprietorship in most ways, but it has two or more owners. The partners share the profits and losses of the business according to a prearranged formula. Generally, any partner can obligate the business pay the obligations. A partnership must be dissolved if the ownership changes, as when a partner leaves or dies. If the business is to continue as a partnership after this occurs, a new partnership must be formed.