Ethical Decision Making Essay

Ethics One definition–Ethics is the code of moral principles and values that governs the behaviors of a person or group with respect to what is right or wrong. Ethical Decision Making The Gut Test–Most of the time you’ll know if something is right or wrong. If it feels fishy, it probably is. Common Ethical Principles Utilitarianism–An ethical choice is one that leads to the†greatest good for the greatest number of people. † Decision takes into consideration of costs and benefits to â€Å"society,† not just for the decision maker or those close to him. Justice–An ethical choice is one that distributes benefits and burdens equitably. Under this principle, both processes and outcomes can be evaluated. Procedural Justice: fairness in the process of deciding/doing/distributing†¦ Distributive/Outcome Justice: equality of outcome/result. Disclosure–A decision is ethical if the public would think it is right. â€Å"How would I feel if my behavior was revealed on†¦ (e. g. , The WSJ, nightly news) or to†¦ (e. g. , my parents, my pastor, my children)? CoCo Framework Control–control comprises those elements in an organization that support people in the achievement of the organization’s objectives. The elements in an organization includes its resources, systems, processes, culture, structure, and tasks. Organization–People working in pursuit of objectives. An organization can be a legal entity, a system or process that produces the outputs to meet a particular objective. The smallest unit of a n organization is the individual person. A person performs a task, guided by an understanding of its purpose (the objective to be achieved) and supported by capability (information, skills, resources, and supplies). The person will need a sense of commitment to perform the task well over time. The person will monitor his or her performance and the external environment to learn about how to perform the task better and about changes to be made. The same is true of any team or work group. In any organization of people, the essence is purpose, capability, commitment, monitoring, and learning. General Categories of Objectives Effectiveness and efficiency of operations–Related to organization’s goals, such as customer service, efficient use of resources, profitability and meeting social obligations. This includes safeguarding of the organization’s resources from inappropriate use or loss and ensuring that liabilities are identified and managed. Reliability of internal and external reporting–Maintenance of proper accounting records, the reliability of information used within the organization, and of information published for third parties. This includes the protection of records against two main types of fraud: the concealment of theft and the distortion of results. Compliance with applicable laws and regulations and internal policies–Includes objectives related to ensuring that the organization’s affairs are conducted in accordance with legal and regulatory obligations and internal policies. Control is effective to the extent that it provides reasonable assurance that the organization will achieve its objectives reliably. Control includes the identification and mitigation of risks. Two more fundamental risks to the viability and success of the organization: Failure to maintain the organization’s capability to identify and exploit opportunities; Failure to maintain the organization’s resilience. Resilience refers to the organization’s capability to respond and adapt to unexpected risks and opportunities, and to make decisions on the basis of telltale indications in the absence of definitive information. Important Concepts in Understanding of Control (a) Control is affected by people throughout the organization. Board of directors, management, and all other staff. b) People are accountable for achieving objectives as well as effectiveness of control that supports the achievement of objectives. (c) Organizations are constantly interacting and adapting. Organizations are constantly adapting in response to changes in the external environment and changes in the internal environment. For control to be effective, the control elements must fit with the organization’s objective, change and adapt. When changes are contemplated to any aspect of the organization, the control consequences should be considered. (d) Control can be expected to provide only reasonable assurance, not absolute assurance. Two reasons absolute control is not possible, even with due diligence exercised: First is limitations of human capabilities. Faulty judgement, human error. Second is cost/benefit considerations. (e) Effective control demands a balance be maintained: i. Between autonomy and integration. The balance between centralization of decentralization, imposing constrains to achieve consistency and granting freedom to act. ii. Between the status quo and adapting to change. The balance between demanding greater consistency to gain efficiency and granting greater flexibility to respond to change. The four pillars of CoCo framework Purpose Establishment and communication of objectives; Identification and assessment of significant risks; Establishment of policies that support the organization in achieving its objectives and managing its risks; the policies must be communicated and practiced, so that people know what is expected of them and their scope of freedom to act; The organization’s plans to achieve its objectives should be communicated and established; Objectives and related plans should include measurable performance targets and indicators. Commitment Shared ethical values should be established, communicated, and practiced throughout the organization; Human resource policies should be consistent with the organization’s ethical values and with the achievement of its objectives; Clear definition of authority, responsibility, and accountability; they should be consistent with an organization’s objectives so that decisions and actions are taken by the appropriate people; An atmosphere of mutual trust should be fostered to support the flow of information between people and their effective performance towards achieving this organization’s objective. Capability People should have the necessary knowledge, skills and tools to support the achievement of the organization’s objectives; Communication process should support the organization’s values and its achievement of objectives; Timely communication of sufficient and relevant information to enable people to perform their assigned responsibilities; The decisions and actions of different pars of the organization should be coordinated; Considering the organization’s objectives and risks, control activities should be designed as an integral part of the organization. Monitoring and Learning External and internal environments should be monitored to obtain information that may signal a need to re-evaluate the organization’s objectives or control; Performance should be evaluated against the targets and indicators identified in the organization’s objectives and plans; The assumptions behind an organization’s objectives should be periodically challenged; Information needs and information systems should be reassessed as objectives change or as reporting deficiencies are dentified; Follow-up procedures should be established to ensure appropriate change or action occurs; Management should periodically assess the effectiveness of control in its organization and communicate the results to those to whom it (management) is responsible. Ouchi Framework Control is interpreted by some authoritative persons as the sum of interpersonal influence relations in an organization. It is equivalent to power. Ouchi about control: The problem of organ ization is the problem of obtaining cooperation among a collection of individuals or units who share only partially congruent objectives. Market Control In a market, prices convey all of the information necessary for efficient decision-making. Markets deal with the control problem through their ability to precisely measure and reward individual contributions. The firm can simply reward each employee in direct proportion to his contribution. The market mechanism permits individuals to pursue non-organizational goal, but at a personal loss of reward. The market mechanism can be very effective only if strict conditions apply. Contributions must be measurable, and a norm of reciprocity assures that, if one party in a transaction attempts to cheat another, the cheater, if discovered, will be punished by all members of the social system, not only by the victim. The severity of the punishment will typically far exceed the crime, thus effectively deterring potential future opportunities. If an agent of an organization cheats to yield higher reward, once discovered, it is the organization that will suffer the punishment. Bureaucratic Control Involves close personal surveillance and direction of subordinates by supervisors. Strict rules and explicit work routines apply. Employees are evaluated based on compliance to rules. Bureaucracies rely on a mixture of close evaluation with a socialized acceptance of common objectives. Supervisors have the right to direct the effort of subordinates on an ad hoc basis. Ad hoc–formed, arranged, or done for a particular purpose only. Rule contains less information than a price. It is an arbitrary standard against which a comparison is yet to be made. Compliance: In exchange for pay, an employee gives up autonomy in certain areas to his organizational superiors, thus permitting them to direct his work activities and to monitor his performance. legitimate right to command† Bureaucratic mechanism is not as efficient as market mechanism in terms of administrative overhead consumption. It also relies heavily on monitoring, which can offend people’s sense of autonomy, which will have a negative effect on their motivation. Cultural/Clan Control Attains cooperation by selecting and socializing individuals so that their individual objectives substantially overlap with the organization’s objectives. Works best in an environment where task performance is inherently ambiguous, and teamwork is common, so that precise evaluation of individual contribution is impossible. The clan mechanism involves internalization of objectives through activities such as ceremonies, stories and rituals, and socialization process. It requires social agreement on values and reliefs. This mechanism reply upon a relatively complete socialization process which effectively eliminates goal incongruence between individuals. The clan lacks explicit price mechanism of the market and the explicit rules in bureaucracy, it relies for its control upon a deep level of common agreement of what constitutes poor behavior, and requires a high level of commitment on the part of each individual to those socially prescribed behaviors. The clan mechanism cannot cope with diversity and high employee turnover. Such disadvantages make it infeasible as a central control mechanism in modern organizations, but it can be efficient if the social requirements can be met. Social and Informational Prerequisites of Control CoSo Framework Internal Control–Internal control is a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with applicable laws and regulations. Internal control is a process and is effected by people at every level of the organization. It can be expected to provide only reasonable assurance. It is geared to the achievement of objectives in one or more separate but overlapping areas. Objectives falls into three categories: Operations–relating to efficient and effective use of the entity’s resources. (EPS or cash-flow targets, process efficiency†¦) Financial reporting–relating to preparation of reliable published financial statements. Compliance–relating to the entity’s compliance to applicable laws and regulations. Components Control Environment The atmosphere in which people conduct their activities and carry out their control responsibilities. Related to the entity’s people–their integrity, ethical values, commitment to competence, and the environment in which they operate. The environment includes aspects such as board of directors, audit committee, management’s philosophy and operating style, organizational structure, assignment of authority and responsibility, human resources policies and practices. An effective control environment is a environment where competent people understand their responsibilities, the limits of their authority, and are knowledgable, mindful, and committed to doing what is right and doing it the right way. They are committed to following an organization’s policies and procedures and its ethical and behavioral standards. The control environment encompasses technical competence and ethical commitment. † Evaluation Criterions Integrity and ethical values–Existence and implementation of codes of conduct and other policies egarding acceptable business practices, conflict of interest, and expected standards of ethical or moral behavior. Dealings with employees, suppliers, customers, investors, creditors, competitors, and auditors, etc. Pressure to meet unrealistic targets. Commitment to competency–Formal or informal job descriptions, knowledge and skills to adequately perform jobs. Board of directors or audit committee–Independ ence from management; frequency and timeliness of meetings with management, sufficient and timely communication between management regarding significant organizational activities and financial performance/position. Management’s philosophy and operating style–Whether management is risk adverse, risk neutral, or risk seeking. Frequency or interaction between senior management and operating management. Attitudes towards financial reporting. Organizational structure–Appropriateness of the entity’s organizational structure, and its ability to provide the necessary information flow the manage its objectives. Adequacy of definition of key manager’s responsibilities, and their understanding of these responsibilities. Assignment of authority and responsibility–Assignment of responsibility and delegation of authority to deal with organizational goals and objectives, operating functions and regulatory requirements, including responsibility for information systems and authority to implement changes. Human resource policies and practices–Deals with policies and procedures for hiring, training, promoting, and compensating employees, management of employee retention and turnovers. Risk Assessment A precondition to risk assessment is establishment of objectives. Risk assessment is the identification and analysis of relevant risks to achievement of objectives. There are three categories of objectives: Operations objectives–relate to achievement of an entity’s basic mission, the fundament reason for its existence. Financial reporting objectives–address the preparation of reliable financial statements. Compliance Objectives–entities must conduct their activities in accordance with applicable laws and regulations. Financial Reporting Objectives Existence or Occurrence–Assets, liabilities, and equity exist at a specific date, and recorded transactions actually occurred. Completeness–All transactions, events, and circumstances in a specific period that should have been recorded have been indeed recorded. Rights and Obligation–Assets (rights) and liabilities (obligations) are recorded. Valuation and Allocation–Assets, liabilities, revenue, and expense components are recorded at appropriate amounts in conformity with relevant accounting principles. Transactions are mathematically correct and appropriately summarized, and recorded in the entity’s books and records. Presentation and Disclosure–Items in the financial statements are properly described and correctly classified. Overlap of Objectives An objective in one category may overlap or support an objective in another. Example: â€Å"Close quarterly within 10 workdays. † Primarily an operation objective, but can also be a financial reporting and compliance objective, as the firm is required to file financial statements timely in accordance with SEC regulations. Evaluation of Objectives: Entity level: The entity-wide objectives provide sufficiently broad statements and guidance on what the entity desires to achieve, yet which are specific enough to relate directly to this entity. These objectives need to be communicated to employees and the board of directors. Business plans and budges need to be consistent with the entity-wide objectives and current conditions. Activity level: Strong linkage of activity-level objectives with entity-wide objectives and strategic plans. Important objectives (the critical success factors) need to be identified. tc. Once goals and objectives are determined, identify risks that threaten goals. Stated and implied risks External and internal factors Entity to activity level Risks at the entity level include those associated with external and internal factors. External factors are very much like the economic factors that affect demand for a product, such as: Technological development Changing customer needs or expectations, which can affect product development, production process, customer service, pricing and warranties. Competition New laws and regulations Natural disasters Economic changes Other extraordinary events Internal factors involve the internal conditions of the entity, such as: Disruption in information systems Quality/competency of personnels hired Change in management responsibilities Nature of the entity’s activities Ineffective board or audit committee Activity level involve the potential risks hidden in the normal course of business. Example: objective is to maintain adequate raw material inventory. The risks to not achieving the activity objective might include goods not meeting specifications, or not being delivered in needed quantities, on time, or at acceptable prices. Analyzing risks–risk mapping. Likelihood (frequency) and magnitude. Managing Change: changed operating environment (regulatory or economic), new key personnels, rapid growth (existing systems may be strained to the point where controls break down), new technology, new lines, products, activities†¦ Evaluation of Risks The firm needs to have adequate mechanism to identify risks arising from both external and internal factors. These risks need to be thoroughly assessed in terms of estimated significance based on the likelihood of occurring and magnitude of impact on goal achievement. Then, needed actions must be determined. Significant risks for each significant activity-level objective also need to be identified.