Ethical Issues in Accountancy - Essay Example

Corporate Social Responsibility (Ethical Issues in Accountancy) Introduction there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud Milton Friedman, Capitalism and Freedom, page 133, 1962 Things have changed much since Milton Friedman's narrow description of the social responsibility of business. The growing influence of corporate brands, the spread of pervasive information and communications technologies have increased the visibility of business. Large businesses have become more prominent and have wide ranging social impact and influence (Jupp, 2002, p 16). The growth of corporate visibility and influence has led to their owning ethical and moral responsibility for their products and actions and consequences thereof on society and individuals. Corporations have been accused of accounting fraud, insider trading, executive over-pay, declining pension funds or in general of corporate 'greed' and 'irresponsibility'. The 1998 OECD guidelines for multinationals lay down responsibility towards human rights, the environment and elimination of child and forced labour. OECD code 2000 is 'the reflection in management practice of various legal, regulatory and social pressures that motivate the company to prevent abuses of market power and to redress other sorts of market failure' (OECD, 2001) Business is faced with a challenge to improve creation of wealth for its shareholders and at the same time to meet requirements of the changed perceptions of social and ethical responsibilities, which in the short-run perspective, might not be compatible. However, with the change in stockholder awareness and scepticism, the company is also being tasked to meet its social and ethical obligations. A specific instance is the negative impact of a company's product on the community and how far is the responsibility to be laid at the doors of management when the cause of the impact might have been due to a product marketed decades back and especially when scientific awareness of the negative impact was not known. This essay is written to research and examine the different issues involved in the above circumstances, especially in light of the behaviour of James Hardie Industries who were involved in a case based on the negative affect of the use of asbestos in its products, and how these impact the ethical issues in accountancy. Literature Survey Literature survey in this research is targeted at the impact of new requirements of ethics and social responsibility accounting on the basic principles of accountancy and audit functions as well as the literature available on the John Hardie Industries case. These are given as Sections I and II respectively below: Section I Changing expectations and skepticism of the stakeholder, places pressure on companies to accept moral responsibility for the negative impact of their products on the community even though the claims may arise from operations many decades ago. Society is increasingly suspicious about the moves by corporations to avoid their responsibilities, which eventually leads them to bowing to pressure from a society skeptical of their protests of innocence and pretence of compassion for those who have suffered from their activities. The question therefore arises as to how far management is responsible for the negative impact of their products on the consumer and society. "Having a corporate conscience means that a company takes responsibility for its actions just as any conscientious individual would be expected to do. In corporate terms, this means that a company is accountable to the public for its behaviour not only in the complex organisational environment but in the natural physical environment as well. A company is thus responsible for its products and for its effects on the public". (Guerrette, 1986, p 410) It is thus essential that companies disclose details of their actions at all times for full public view and not only when suspicions are raised about the legitimacy of their actions. No comprehensive legislation exists on this issue, but compliance with legal provisions is an extremely narrow view of corporate responsibility. Thinking on the subject is evolving every day and broad parameters of disclosure are well understood and must be followed. Organizations have technical and management efficiencies but to survive, organizations must understand and negotiate many environmental influences on their operations. Institutional theory suggests that an organization's legitimacy is equally necessary for survival (Powell & DiMaggio, 1991). In order to survive and thrive in their social environments, organizations need more than material resources and technical information, they need social acceptability and credibility (Scott et al., 2000), and competence (Hearit, 1995). Organizational legitimacy is defined as the 'generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within a social system' (Suchman, 1995, p.574). It is extremely rare for companies to provide comprehensive social reports covering all aspects of their social performance (Blake, Pilkington & Gowthorpe, p197). While the main aim of the annual report remains to provide financial information, companies choose to report only what is mandatory and a selective report on some of the CSR issues that reflect well on the companies' performance. While increased reporting may show increased social responsibility there are no studies available that show that it drives socially responsible behaviour. On the other hand there are cases where such reporting has been deliberately used to draw attention away from irresponsible behaviour. Atlantic Richfield produced a Social Report in 1977 that did not mention that it was responsible for an environmental catastrophe involving nuclear waste (Patterson in Gray et al 1996, 112). However Corporate Community Involvement (CCI) may be an area that drives greater action by companies since this shows them in a better light. Yet, it is rare that CCI is motivated by altruism alone (Clarke 1997, p202). Through dressing up a business decision to reflect altruistic intent the business may get praise while the basic intent may have been purely profit driven. The actions of an organization might not be perceived as legitimate at a particular point of time while they were within acceptable norms a few years back, since the basic concept of legitimacy itself keeps changing (Lindblom, 1994). What is deemed proper today might be construed as illegitimate behavior a few years down the line. Sometimes specific events occur that have a detrimental effect on the reputation of the company (Patten, 1995). In the circumstance that the organization faces a threat of its activities being challenged as being illegitimate they have few alternatives to legitimize their activities and these could be (Dowling & Pfeffer, 1975, p. 127): adapt output, goals and methods of operation to conform to prevailing definitions of legitimacy attempt, through communication, to alter the definition of social legitimacy so that it conforms to the organization's present practices, output and values attempt through communication to become identified with symbols, values or institutions which have a strong base of legitimacy These are roughly what Lindbolm (ibid) also proposes. But the basis is the same - communicate to change perceptions. Remedial action which is not publicized will not be effective in changing perceptions (Cormier & Gordon, 2001). This perspective highlights the strategic importance (and power) of corporate disclosures, such as those made within annual reports and other publicly released documents. However, communications from an organization are treated with increasing skepticism by the stakeholders and public alike. These are treated as a disclosure of information to protect themselves from the accountability angle and that despite making negative impact on the society they may continue operations. Social progress could be hindered by such legitimizing strategies (Puxty, 1991). So what kind of legislation will ensure that public disclosures by companies shall be made on the basis of belief of what should be made known to the public and not as a protective strategy after the event Law can only reinforce changes in social values, the requirements under law proscribes narrow accountability and responsibilities (Warren, 1999). Change has to be led by the society itself that forces organizations to take full responsibility for their actions that may damage the environment or society. With a few exceptions like Ness and Mirza (1991), advocates of Positive Accounting Theory (Watts and Zimmerman, 1986) have typically not chosen to study issues associated with the manager's choice to disclose social and environmental information. Section II The following information has been culled from the following sources and is quoted verbatim at places: 1. ABC News on line 2. Parliamentary Library, Parliament of Australia 3. Paper by Patel, A and Xavier, R. 'Legitimacy Challenged', July 2005 A publicly-owned company, James Hardie Industries (JHI) was listed on the Australian Stock Exchange in 1951. It manufactured and sold products that had asbestos as an essential component.These operations continued under different companies of the same group till the 1980s. Many of these products resulted in people developing asbestosis and mesothelioma. The company has been accused of not handling their liabilities to these victims properly. A number of factors were included as part of the allegations, such as its restructure, resulting in the move to the Netherlands, and its reorganization of the business relationships between related companies, which were done to minimise financial exposure to employees who had become sick after working at its asbestos mines and manufacturing plants. During the mid-90s JHI and its subsidiary and affiliated companies used many subterfuges to avoid payment to the affected people through mergers and hiving off businesses in order to lay down a maze of financial restructuring. The total amount of liability was also assessed by an actuarial company that laid the liability from being 574 million AUD in 2001 changed to 1089 million AUD in 2003. The same company, Trowbridge, had estimated the liability to be below AUD 300 million in its first assessment. In 2001 JHI set up the Medical Research and Compensation Foundation (MRCF) to provide financial compensation for victims of asbestos related diseases caused by their products. MRCF later criticized JHI for providing insufficient funds for settling claims from victims. A massive shortfall in funds to compensate asbestos victims has led to a call for retrospective law reform to stop parent companies avoiding their liabilities. An inquiry into MRCF has recommended that bankruptcy law should also be reformed. Lawyers say that shows the need for a public court-based way to ensure an insolvent or wound-up company keeps assets to compensate future victims. They also argue the limited liability principle is allowing holding or parent companies to avoid the liabilities of under-funded subsidiaries. They recommend law reform to make holding companies liable when people are killed or injured by company wrongs. On 10 August 2004, JHI announced strong profits. A day later, it announced the resignation of its Board Chairman Alan McGregor due to ill health, and that he had been replaced by director Meredith Hellicar. Another day later, John Sheehan, the senior legal counsel assisting the inquiry, made recommendations that the company's chief executive officer, Peter Macdonald, be charged with fraud. (These charges carry a maximum penalty of 8 years in prison and fines of AUD 350,000; James Hardie could also face fines of AUD1.75 million.) The basis of charges are a February 2001 press release where the company claimed the adequacy of its compensation fund was based on expert advice from accountancy firms which, allegedly, effectively misled the public and the Australian Stock Exchange. "I can assure people, and particularly anyone who is watching who is suffering from asbestos disease or who has a family member or friend who is suffering, the union movement will not be letting this issue go. This is one of the largest exercises to avoid moral and legal obligations in Australia's corporate history and we are going to fight very hard to bring them to justice" - ACTU Secretary Greg Combet speaking on ABC TV Lateline Discussion and Analysis The JHI case is typical of some of the cases of responsibility for actions in the past have come to haunt present managements. Despite this companies continue to operate in areas that may be termed doubtful at best with pure profit motive driving their actions. JHI entered the business of manufacturing goods containing asbestos long before their incorporation into a limited liability company in 1951. At that time the dangers associated with asbestos were not known or not fully understood. It also stands to reason that there might even now be products and materials that may harm the workers or users and the harmful effects will only emerge with time as science progresses and better understanding evolves. However, the responsibility for redressing damage caused lies squarely on the shoulders of the organization that caused it whether it was through ignorance or a deliberate decision to ignore the potential hazard in the interest of profit making. The case of JHI is one of a company trying to dodge its moral and social responsibility through changing its structure both financially as well as from management organization. The MRCF set up was with a clear intent to pass the liability to a different organization. The Actuarial company, in assessing the damages at an absurdly low value of less than AUD 300 million (of which about 30 was to be recovered from insurance) played into the hands of management. This allowed JHI to place this limited fund with MRCF and declare that the fund now had enough money to meet the asbestos related liability in all earnestness before the court of law. The court then had no hesitation in allowing JHI to move its headquarters out of the country to Holland. The same actuarial company now estimates the liability at 1089 million AUD whereas the lawyers maintain that the liability is likely to be close to 2 Billion. The MRCF is going to run out of funds by the middle of 2007 and the victims shall be left with no further compensation unless the Australian government can amend its laws in time to bring the original company to make up the balance funds. We have seen earlier in this report that there is no way that legislation can lead to complete disclosure and it must be the companies themselves that must understand their obligation to the public and the environment and act accordingly. Most important of all - they must keep everyone informed about what they are doing. Conclusion Getting involved in litigation and becoming targets of compensation demands can damage the reputation and threaten the very existence of companies. Thus, companies must strengthen their viability and legitimacy through associating the concerned public and their own employees in key decision making processes. One of the very important lessons learnt from survey of literature is that companies must communicate. It is vital that companies address this issue in all their communications, whether they be annual reports with triple bottom-lines or notices on the product/packaging about all and every chance of damage or harm that may be perceived in the use of their products or services. Having done so, and making sure that all decisions were made with the best interest of the society and stakeholder, the company stands a chance of retrieving a potentially damaging situation at a later date. 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(1986), Positive Accounting Theory, Prentice Hall, Englewood Cliffs, NJ Read More