Chapter # 09

Ethical Decision Making

Models
LO 01: THE NATURE OF ETHICS:
Ethics, also called ‘moral philosophy’ is a branch of Philosophy that defines and explains the concepts of right and wrong
values, good and bad conduct, just and unjust decisions. It entails the theories, concepts and applications that help
understand the differences between what is right and wrong and what lies in between these two extremes.
For instance, should a finance professional conceal figures in the annual report to make the company look profitable? Should
a doctor donate organs of a deceased person without his prior consent for the benefit of other patients? Does manufacturing
and selling cigarettes count as an ethical business? Should media companies advertise products that are injurious to health?
Should lawyers continue to defend the suspect after knowing that he is guilty of the crime convicted? These are the questions
addressed by the field of business ethics aiming to comprehend the acceptability of such practices. Apart from the legal status
of all the above stated issues, it is important to assess their ethical spectrum.
We all know that it is wrong to kill people but is it wrong to kill criminals. Between the two extremes of killing and not killing
criminals comes the middle ground - correctional centers and prisons. Most of the people in most of the situations are
completely aware of what is right and wrong but when these people face a little complication wherein the right becomes
wrong under certain circumstances then the ethical dilemmas arise. Ethical dilemmas arise when norms and values are in
conflict, and alternative possibilities lie within the two extremes of right and wrong. These alternatives are not entirely right
and wrong but fall somewhere in between. In such situations, the decision is based on the acceptability level of an individual.
This is where ethics come into play by explaining what is acceptable and what is not in terms of moral grounds. It addresses
the problems that arise when two or more rights are in conflict and provide guidance through various ethical models for
managing such situations. Since it acts as a guidance for behavior, it helps to avoid real-life problems.
LO 02: BUSINESS ETHICS:
Ethics is a vast subject and has numerous definitions with varying nuances. To begin with, it is a set of moral principles or
values. This definition by meaning is relatively subjective since moral principles and values vary from person to person.
However, the world of ethics does not operate in this way or else there would be no need for the study of ethics at all. A
refined version of this definition by Trevino and Nelson is,
“The principles, norms and standards of conduct governing an individual or group.”
This definition focusses on conduct or behavioral attributes.
Manuel Velasquez states that there are no ethical standards that are true absolutely, i.e., that the truth of all ethical standards
depends on (is relative to) what a particular culture accepts. The ethical relativist holds that a person’s action is morally right if
it accords with the ethical standards accepted in that person’s culture. The theory is in contrast with how the business ethics
work. Trevino and Nelson explained ethical behavior in business as,
“Behavior that is consistent with the principles, norms and standards of business practice that have been agreed upon by
society.”
In organizations, rules of ethical conduct are developed that include corporate values, norms of dealing with suppliers and
customers, professionally accepted behavior, gift policies, and other rules as to what is allowed or not within the working
premises. All these rules are based on generally accepted principles of the society in which the business operates.
2.1 Business sense of ethical culture:
High ethical standards require individuals and businesses to conform to the moral principles and values. Just as individuals
build a good character by following morals, in the same way businesses develop an honorable reputation by conforming to
ethical standards. A high ethical standing in the corporate world consequently takes businesses to the path of increased
profits and continuous growth. Whereas, those organizations that are inclined towards unethical practices are doomed. A
business committed to ethical behavior in its day to day operations builds positivity in its relationship with employees,
customers, investors, general public and other stakeholders.
Employees’ Commitment:
Ethics contribute to employee commitment greatly when employees trust that the company is working for the benefit of its
employees and the general public as well. On the contrary, employees who feel that their employer is not following ethical
standards are more likely to break ethical code of conduct and compromise on values such as integrity, loyalty, fairness and
respect while making decisions. This consequently creates issues for the company that adversely effects on the performance.
Example:
Imagine a tech startup where employees feel empowered to innovate and contribute ideas freely. The company
encourages open communication and values integrity in decision-making. As a result, employees feel a strong sense of
belonging and dedication to the company's mission. They willingly go the extra mile, leading to higher productivity and a
lower turnover rate. In contrast, a company that neglects ethical standards and treats employees unfairly may experience
distrust, disengagement, and higher turnover, which can hinder productivity and innovation. Ethical behavior fosters a
positive work environment where employees are motivated to contribute their best efforts, driving overall company
success.
Investor Confidence:
Investors nowadays recognize the importance of investing in an ethically sound corporation than the one that is not. They
understand that an ethical culture within a company provides the right foundation and growth for the company in the right
direction. However, an organization without ethical standards is prone to many risks and issues such as lawsuits, tarnished
reputation, and loss of customers and profits.
Undoubtedly, investors look for financial fundamentals as their major concern when investing in a company but they also look
for a company that not just has a large market size but also is strong on ethical ground.

Example:
Consider an investment firm choosing between two tech startups. One has a transparent approach to financial
reporting and ethical business practices. The other has been involved in scandals for misleading investors. The firm opts
to invest in the first startup due to its ethical reputation, seeing it as a safer and more trustworthy choice.
Customer Satisfaction:
Since a company’s revenue comes from its customers, the success of the company is highly dependent on customer
satisfaction. While companies continuously work on developing long-term relationships with the customers to retain them.
This long lasting relationship can only be built when the customer has trust in company’s conduct of business.

Example:
Think of a local bakery known for using organic ingredients and fair trade practices. Customers trust the bakery's
commitment to quality and ethical sourcing, leading to loyal patrons who prefer its products over competitors. In
contrast, a bakery using cheap ingredients may struggle with customer trust and repeat business.
Profits:
Unethical decisions potentially lead to significant loss along with other litigations and reputation blows. Although ethics might
not always bring profits, it is undoubtedly the best course of action to take because focusing solely on profits cannot build a
strong foundation for the company intending to operate in the long run.

Example:
Picture a global clothing brand that prioritizes fair labor practices in its factories. Despite higher production costs, the
brand builds a loyal customer base that supports its ethical stance. This positive reputation attracts more customers,
ultimately driving higher sales and profitability. Conversely, a competitor cutting corners on labor ethics may face boycotts
and reputational damage, impacting profits negatively.
Profits:
Unethical decisions potentially lead to significant loss along with other litigations and reputation blows. Although ethics might
not always bring profits, it is undoubtedly the best course of action to take because focusing solely on profits cannot build a
strong foundation for the company intending to operate in the long run.

Example:
Picture a global clothing brand that prioritizes fair labor practices in its factories. Despite higher production costs, the
brand builds a loyal customer base that supports its ethical stance. This positive reputation attracts more customers,
ultimately driving higher sales and profitability. Conversely, a competitor cutting corners on labor ethics may face boycotts
and reputational damage, impacting profits negatively.
2.2 Ethical issues and dilemmas in business:
According to Fraedrich and Ferrell,
“An ethical issue is a problem, situation or opportunity that requires an individual, group or organization to choose among
several actions that must be evaluated as right or wrong, ethical or unethical”.
In normal circumstances in an ethical issue, there is a clear distinction between what is right and wrong thus, it is
comparatively easy to make a decision if the person is trying to make the right decision. On the other hand, there may be a
situation when a problem requires an individual, group or organization to choose among several wrong or right actions.
Ideally, this means selecting an option that is the best among all the possibilities. Here the decision maker is embroiled in a
state of confusion and needs guidance to follow.
2.3 The guidance on ethical issues:
The guiding principles for ethical decision making for a chartered accountant in Pakistan are given in Code of Ethics for
Chartered Accountants issued by the Institute of Chartered Accountants of Pakistan.
In addition to the Code, the professionals also need frameworks, principles and approaches to make effective and ethical
decision-making. The two models being discussed here are:
 The American Accounting Association (AAA) model
 Tucker's 5-question model
LO 03: FRAMEWORKS FOR ETHICAL DECISION MAKING:
When confronted with making decisions in professional life, primary guidance comes through law, corporate codes of
conduct, Standard Operating Procedures and the sorts. However, these guidelines may not work well in case of ethical
dilemma. In such circumstances, professionals turn towards other sources such as theoretical frameworks, principles and
approaches inked by scholars and philosophers to acquire adequate guidance for effective and ethical decision-making.

Frameworks For Ethical Decision Making

The American Accounting Association (AAA) model Tucker’s 5-question model

 The American Accounting Association (AAA) model

The American Accounting Association (AAA) model originates from a report for the AAA authored by Langenderfer and Rockness
in 1990. In the report, they suggest a, seven-step process for decision making, which takes ethical issues into account.

Step 1 Establishing the facts of the case

Step 2 Identify the ethical issues in the case

Step 3 An identification of the norms, principles and values related to the case

Step 4 Each alternative course of action is identified

Step 5 Matching norms, principles, and values to options

Step 6 The consequences of the outcomes are considered

Step 7 The decision is taken

Example – Opulent Furniture:
Opulent Furniture (Pvt.) Ltd is one of the largest furniture retailers and has its manufacturing facilities and retail shops
across the globe. The company designs and sells premium quality furniture and hardwood flooring. The company, due to the
nature of its products, is aware of the deforestation it causes in different regions where it operates. However, the company’s
values and principles display a high regard for environmental concerns as shown in their vision statement:
“At Opulent Furniture our vision is to provide the highest quality furniture for all our customers across the globe whilst
integrating environment-friendly practices in the manufacturing of our products.”
A recent report entitled “Companies Costing the Environment”, published by the Environmental Protection Agency,
suggested that Opulent Furniture was clearcutting virgin trees over thousands of acres. If this large-scale deforestation
continued, South Asia would be left with significant environmental damage such as loss of habitat, higher stream
temperatures, flooding and dying fish which could take decades to repair.
Opulent defended itself by claiming that it sources 55% of its wood from sustainable sources and is aiming to reach 80% in
the next five years. It also referred to its heavy contribution towards forest management and reforestation.
AIA has recently joined the company as an Assistant Internal Auditor at a very handsome salary package. She is assigned to
verify the sourcing of wood used during the last six months. She has found that the verification process regarding supplies
of Forest Stewardship Council (FSC) certified wood is not effective. Most of the time the description on invoices for the
wood is accepted as sufficient evidence of sustainable sourcing. She also noted that the spending on forest management
includes significant amounts for staff forest visits, which in her opinion are meant for sourcing wood rather than any
supporting activities for forest management. She has taken her concerns to the CFO who has told her this is the way
business is conducted in the industry, and asked her not to highlight these areas in her report. Two days later, the company
offers her complete hardwood flooring along with rosewood furniture for her apartment at a 50% discounted price. She is
surprised, since as per company policy this is only offered after one has been employed for more than two years.