Business Ethics - Part 2 - Chapter 6

The German Jordanian University
(GJU)
Summer Semester 2011
MGT 316
Instructor: Montaser Tawalbeh

Business Ethics
School of Managerial and Logistic Sciences
Part 2. The Practice of Business
Ethics
Business Ethics A Real World Approach
Andrew W. Ghillyer
2
nd
Edition

New York, NY
ISBN 9780071100656
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

The Role of Government
Frontline Focus

Too Much Trouble (p.133)

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


Key Legislation
The 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 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 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:


1- 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.

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.

2- 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 bark worse then its bite
The 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.


Examples 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).

- 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!

Making Sense of FCPA
Table 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 Questions
Q1, 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 companys 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 businesss 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 oversight
2. Corporate policies
3. Communications of standards and procedures
4. Compliance with standards and procedures
5. Delegation of substantial discretionary authority

6- Consistent discipline
7- 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 $350K
Based on variety factors, penalty increased to $1.4 Mil
The 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.


Q1, Q2, Q3, and Q4. (p.140).

Revised Federal Sentencing Guidelines for
Organisations (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 Gap
Q1, Q2, Q3, & Q4.


Q1, Q2, Q3, and Q4. (p.141).

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
clients 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 Responsibility
1. 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 companys 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 Focus
Too Much Trouble Susan Makes a Decision (p. 146)
- Answer Q1, Q2, and Q3.

Business Ethics - Part 2 - Chapter 6

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