Business Ethics - Part 2 - Chapter 6

The German Jordanian University (GJU)

Summer Semester 2011MGT 316

Instructor: Montaser Tawalbeh

Business EthicsSchool of Managerial and Logistic Sciences

Part 2. The Practice of Business Ethics

Business Ethics A Real World Approach

Andrew W. Ghillyer2nd Edition

New York, NYISBN 9780071100656

http://www.mcgraw-hill.com.au/

Part 2. The Practice of Business Ethics

Chapter 6. The Role of Government- Identifying the five key pieces of U.S legislation designed

to discourage, if not prevent, illegal conduct within organisation.

- Understand the purpose and significance of the Foreign Corrupt Practices Act (FCPA)

- Categorise the six key principles of the Defence Industry Initiatives (DII)

- Calculate monetary fines under the three-step process of the U.S Federal Sentencing Guidelines for Organisations (FSGO)

- Compare and contrast the relative advantages and disadvantages of the Sarbanes – Oxley Act (SOX)

Part 2. The practice of Business Ethics Chapter 6. The Role of Government

The Role of GovernmentFrontline Focus

Too Much Trouble (p.133)

- Q1, 2, and 3. (p.133)


The Role of GovernmentKey LegislationThe last line of defence has been a legal and regulatory

framework that offers financial incentives to promote ethical behaviour and imposes penalties for those that choose not to adopt such behaviour. Since 1970 there have been five key attempts at behaviour modification to discourage or prevent illegal conduct within organisations as the following:


The Role of Government- The Foreign Corrupt Practices Act (1977). (FCPA)- The Defence Industry Initiatives (1986). (DII)- The U.S. Federal Sentencing Guidelines for Organisations (1991). (FSGO).- The Sarbanes-Oxley Act (2002). (SOA)- The Revised Federal Sentencing Guidelines for organisations (2004). (RFSGO)


The Role of GovernmentThe Foreign Corrupt Practices Act (1977). (FCPA)The FCPA: is a legislation introduced to control bribery and

other less-obvious forms of payment to foreign officials and politicians by American publicly traded companies.

Prior to the passing of this law, the illegality of this behaviour was punished only through “secondary” sources of legislations as the following:


The Role of Government1- The Securities and Exchange Commission (SEC): could

fine companies for failing to disclose such payments under their securities rules.

2- The Bank Secrecy Act: also required full disclosure of funds that were taken out of or brought

Into the United States.3- The Mail Fraud Act: made the use of the U.S. mail or

wire communications to transact a fraudulent scheme illegal.


The Role of Government To give the legislation some weight, the U.S. Department

of Justice (DOJ) and the Securities and Exchange Commission (SEC) jointly enforced the FCPA.

The act encompasses all the secondary measures that were currently in use to prohibit such behaviour by focusing on two distinct areas:

1- Disclosure: The act requires corporations to fully disclose any and all transactions conducted with foreign officials and politicians, in line with the SEC provisions.


The Role of Government2- Prohibition: The act incorporated the wondering of the

Bank Secrecy Act and the Mail Fraud Act to prohibit the movement of funds overseas for the express purpose of conducting a fraudulent scheme.


The Role of GovernmentThe bark worse then its biteThe FCPA was criticised for lacking any real teeth because

of its formal recognition of facilitation payments which would otherwise be acknowledged as bribes.

Facilitation Payments: Payments that are acceptable (legal) provided they expedite or secure the performance of a routine governmental action.

Routine Governmental Action: Any regular administration process or procedure, excluding any action taken by a foreign official in the decision to award new or continuing business.


The Role of GovernmentExamples for governmental Action:- Providing permits, licenses, or other official documents to

qualify a person to do business in a foreign country.- Processing governmental papers, such as visas and work

orders.- Providing police protection, mail pickup and delivery, or

scheduling inspections associated with contract performance or inspections related to transit of goods across a country

- Providing phone service, power, and water supply; loading and unloading cargo, or protecting perishable (easy to spoil)

products or commodities from deterioration (getting spoiled).


The Role of Government- Performing actions of a similar nature.

The key distinction in identifying bribes was the exclusion of any action taken by a foreign official in the decision to award new or continuing business!


The Role of GovernmentMaking Sense of FCPATable 6.1 page 136, summarises the fine line between legality and

illegality in some of the prohibited behaviours and approved exceptions in the FCPA provision.

The Department of Justice enforces criminal penalties of up to $2 million per violation for corporation. Meanwhile, officers, directors, stockholders, employees, and agents are subject to a fine of up to $250,000 per violation and imprisonment for up to five years.

However, penalties under the books and recordkeeping provisions can reach up to $5 mils and 20 years imprisonment for individuals and up to $25 mils for organisations.


Progress Check QuestionsQ1, Q2, Q3, and Q4. (p.135).


Defense Industry Initiatives (DDI)Is a document consist of six principles that were

intended to promote sounds management practices, to ensure that companies were in compliance with complex regulations, and to restore public confidence in the defense industry. Principles are as the following:

1. Each company will have and adhere to a written code of business ethics and conduct.

2. The company’s code will establish the high values expected of its employees and the standards by which they must judge their own conduct and that of their organisation.


3. each company will create a free and open atmosphere that allows and encourages employees to report violations of its code to the company without fear of retribution for such reporting.

4. Each company will have the obligation to self-govern by monitoring compliance with federal procurement laws and adopting procedures for voluntary disclosure of violations of federal procurement laws and corrective actions taken.


5. Each company will have the responsibility to each of the other companies in the industry to live by standards of conduct that preserve the integrity of the defense industry.

6. Each company must have public accountability for its commitment to these principles.


Federal Sentencing guidelines for organizations (FSGO) • It applies to organizations and holds them liable for

the criminal employees and agents. • Its mission to promote ethical organizational

behavior and increase the costs of unethical behavior.

• It also includes an exhaustive list of covered business crimes that it appears frighteningly easy for an organization to run afoul (conflict) of federal crime laws and become subjects to FSGO penalties.

• Penalties under FSGO include monetary fines, organizational probation, and the implementation of an operational program to bring the organization into compliance with FSGO standards.


Monetary Fines under the FSGO• A fine is calculated through a three-step process:Step 1: Determination of the “Base Fine” the base fine will normally be the greatest of: The monetary gain to the organization from the

offense. The monetary loss from the offense caused by the

organization, to the extent the loss caused knowingly, intentionally, or recklessly.

The amount determined by a judge based upon an FSGO table.


Step 2: The Culpability Score.Once the base fine has been calculated, the judge will

compute a corresponding degree of blame or guilt known as the culpability score ( the calculation of a degree of blame or guilt that is used as a multiplier of up to four times the base fine. The culpability score can be adjusted according to aggravating or mitigating factors).


The culpability score can be increased (aggravated) or decrease (mitigated) according to predetermined factors.

o Aggravating factors:1. High-level personnel were involved in or tolerated

the criminal activity.2. The organization willfully obstructed justice.3. The organization had a prior history of similar

misconduct.4. the current offense violated a judicial order,

injunction, or condition of probation.


o Mitigating factors:1. The organization had an effective program to

prevent and detect violations of law.2. the organization self-reported the offense to

appropriate governmental authorities, fully cooperated in the investigation, and acceptance responsibility for the criminal conduct.


Step 3: Determining the Total Fine Amount.The base fine multiplied by the culpability score gives

the total fine amount. In certain cases, however, the judge has the discretion to impose a so called Death Penalty (where the fine is set high enough to match all the organization assets. This is warranted where the organization was operating primarily for a criminal purpose).


Organisational Probation:In addition to monetary fines, organisations also can be

sentenced to probation for up to 5 years. The status of probation can include the following requirements:

1. Reporting the business’s financial condition to the court on a periodic basis

2. Remaining subject to unannounced examinations of all financial records by a designated probation officer and/or court appointed expert.

3. Reporting progress in the implementation of a compliance program

4. Being subject to unannounced examinations to confirm that the compliance program is in place and is working.


Compliance Program:The best way to minimise your culpability score is to

make sure that you have some form of program in place that can effectively detect and prevent violations of law – The Compliance Program.

The FSGO prescribes seven steps for an effective compliance program:

1. Management oversight2. Corporate policies3. Communications of standards and procedures4. Compliance with standards and procedures5. Delegation of substantial discretionary authority


6- Consistent discipline7- Response and corrective action

Ex: A $25K bribe to a city official to grant a franchise.This is a level 18 offense with a base penalty of a $350KBased on variety factors, penalty increased to $1.4 MilThe minimum fine with mitigation circumstances

(company has a compliance plan for example) would have placed this fine in the $17,500 to $70,000 range instead of $1.4 Mil.




Revised Federal Sentencing Guidelines forOrganisations (2004)In 2004, the U.S. Sentencing Commission proposed to

Congress that should be modifications to the 1991 guidelines to bring about key changes in corporate compliance programs.

The revised guidelines made in 2004 three key changes:1. They required companies to periodically evaluate the

effectiveness of their compliance programs on the assumption of a substantial risk that any program is capable of failing.

2. They required evidence of actively promoting ethical conduct rather than just complying with legal obligations.

3. The guidelines defined accountability more clearly.


Ethical Dilemma (p.140)

Case 6.1 The Bribery GapQ1, Q2, Q3, & Q4.




Life Skills (p.141)

Governing you own ethical behaviour


The Sarbanes-Oxley Act (2002)

The Sarbanes-Oxley Act became a law in 2003: It is a legislative response to the corporate accounting scandals of the early 2000, which covers the financial management of business.

The act contains 11 sections, 70 subsections covering every aspect of the financial management of businesses.


Title I: Public Company Accounting Oversight Board (PCAOB)

An independent oversight body for auditing companies.The creation of the PCAOB was an attempt to

reestablish the perceived independence of auditing companies. Also, as an oversight board, the PCAOB was charged with maintaining compliance with established standards and enforcing rules and disciplinary procedures for those organisations that found themselves out of compliance.


Title II: Auditors Independence

SOX introduced several key directives to further enforce the independence of auditors and hopefully restore public confidence ,it:

1. Prohibits specific “nonaudit” services of public accounting firms as violations of auditor independence.

2. Prohibits public accounting firms from providing audit services to any company whose senior officer were employed by that accounting firm within the previous 12 months

3. Requires senior auditors to rotate off an account every five years, and junior auditors every seven years


4. Requires the external auditor to report to the client’s audit committee on specific topics

5. Requires auditors to disclose all other written communications between management and themselves

Title III (3) through XI (11)Here are some highlights of Titles III through XI.

Title III: Corporate Responsibility1. Requires audit committees to be undertake

specified oversight responsibilities.


2. Requires CEOs and CFOs to certify quarterly and annual reports to the SEC, including making representations about the effectiveness of their control systems.

3. Provides rules of conduct for companies and their officers regarding pension blackout periods – a direct response to the Enron situation where corporate executives were accused of selling their stock while employees had their company stock locked in their pension accounts.

Blackout Period: is a period of around 60 days during which employees of a company with a retirement or investment plan cannot modify their plans. Notice must be given to employees in advance of a pending blackout.


Title IV: Enhanced Financial Disclosures

• Requires companies to provide enhanced disclosure, including a report on the effectiveness of internal controls and procedures for financial reporting, and disclosure covering off-balance-sheet transactions.

Title V: Analyst Conflicts of Interest

• Requires the SEC to adopt rules to address conflicts of interest that can arise when securities analysts recommend securities n research reports and public appearances.


Title VI: Commission Resources and Authority

• Provides additional funding and authority to the SEC to follow through on all the new responsibilities outlined in the act.

Title VII: Studies a d Reports

• Directs federal regulatory bodies to conduct studies regarding consolidation of accounting firms, credit rating agencies, and certain roles of investment banks and financial advisors.


Title VIII: Corporate and Criminal Fraud Accountability

• Provides tougher criminal penalties for altering documents, defrauding shareholders, and certain other forms of obstruction of justice and securities fraud.

• Protects employees of companies who provide evidence of fraud.

Title IX: White-Collar Crime Penalty Enhancements

• Provides that any person who attempts to commit white-Collar crimes will be treated under the law as if the person had committed the crime.


• Requires CEOs and CFOs to certify their periodic reports and imposes penalties for certifying a misleading or fraudulent report.

Title X: Corporate Tax Returns

• Conveys the sense of the Senate that the CEO should sign a company’s federal income tax return.

Title XI: Corporate Fraud and Accountability

• Provides additional authority to regulatory bodies and courts to take various actions, including fines or imprisonment, with regards to tampering with records, retaliating against corporate whistleblowers, and certain other matters involving corporate fraud.


Ethical Dilemma (p.145)

Case 6.2 An Unethical Way to Fix Corporate Ethics?Q1, Q2, Q3, & Q4.


Frontline FocusToo Much Trouble – Susan Makes a Decision (p. 146)- Answer Q1, Q2, and Q3.

Documents

Business Ethics - Part 2 - Chapter 6