Ethics and Governance

This article discusses the importance of ethics in modern business and the role of the Banking Royal Commission in addressing misconduct and fraudulent activities. It explores the Utilitarian theory of ethics and its relation to the commission's recommendations. The article also includes a case study of Freedom Insurance Group and the application of APES 110 Code of Ethics for Professional Accountants.

Ethics and Governance
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Ethics and Governance 1
Executive Summary
Ethics is a mandate for modern business as they have huge expectations from the society. It
becomes responsibilities of these businesses and their mangers to adopt the business ethics in
their practice. Banking Royal Commission is working in the sector of banking, insurance and
superannuation by making inquiry into misconduct and fraudulent activities and by making
recommendations.
The report made by banking commission reflects utilitarian theory of ethics that focus on the
results. APES 110 Code of Ethics for professional accountants highlights some principles that
the professional accountants are required to adopt in their performance. Safeguards provided
under this code prescribe the manner in which professionals can adhere to these principles.

Ethics and Governance 2
Contents
Introduction......................................................................................................................................2
Part A...............................................................................................................................................3
Ethics and related theory 3
Relation of Banking Commission report and Utilitarian theory 5
Part B...............................................................................................................................................6
Conclusion.......................................................................................................................................9
References......................................................................................................................................11

Ethics and Governance 3
Introduction
In cases of a corporation, there is a separation between ownership and management of the
business, which is the highlighted key factor (Perera, 2011). In such a situation, there is always a
chance that managerial people can misuse their position in the company. Ethics is always
required in every business that states the manner in which an organization should manage and fix
its activities (Businesscasestudies.co.uk, 2019). In recent times, the ethic becomes more
important in every business as competition is there and stakeholders want to be part of an
organization, which is responsible and accountable for its conducts. Business ethics is a kind of
applied ethics that includes moral principles using which a business can deal with ethical issues
(Courses.lumenlearning.com, 2019).
As mentioned above that every business is required to carry and follow business ethics,
many of the times businesses fail to do so. Following ethics is a part of corporate social
responsibility and corporate governance. In recent times, it has been noted that many of the
banks, financial, insurance, and other related institutions were engaged in misconduct and unfair
practices. To identify such issues and to take action against them a commission was founded
namely. Royal Commission into Misconduct in the Banking, Superannuation, and Financial
Services Industry. The commission is also known as banking commission. The lead objective
behind the development of this commission was to check the misconducts in the banking and
finance industry (Ryan, 2019). The commission worked in depth of this matter and provided its
final report on this subject in February 2019. The presented report has two parts, the first part is
based on the banking commission final report and another part is related to the APES 110 Code
of Ethics For Professional Accountants and related area.

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Part A
Ethics and related theory
Before moving, the discussion towards ethical theories, first, the meaning of ethics in
general as well as in specific sense is required to understand. In general, ethics is a set of honest
principles that govern and organize the behavior of a person (Verderber, Verderber & Sellnow,
2014). It provides the pathway of the right things to people by making the difference between
right and wrong clear. For different people, different activities can be rights or wrong as they, all
have their personal characteristics and opinions. In such a situation ethics, provide what is wrong
and what is not. It helps in practical decision-making (Vitez, 2019). The terms ethics and
morality seems to be interchangeable and therefore whenever someone talks about morality, the
same can refer to the ethical principles. There are many theories of ethics based on their
principles and concepts. These theories are basically the philosophical approaches to ethics.
The royal commission reviewed the misconducts of many organizations and provided
recommendations. These recommendations are closely connected to the Utilitarian theory of
ethics. Now the issue is to check the meaning of this theory. In order to answer, this is to state
that the theory focuses on results and consider an action ethical that lead the greatest good to the
greatest number of people (Saylordotorg.github.io, 2019). As per the belief of this theory, one
needs to take the decisions thinking about the fact that what will benefit the majority. This theory
gives normative ethics (Caae.phil.cmu.edu, 2019). The theory is also known as
consequentialism. In general and in personal ethics, the theory believes that a person should
always do the things, which can bring the best results to all and not only for one. The same goes
for business ethics. If to apply this theory to business then it says that the management of the

Ethics and Governance 5
company should check and review the results of their decision. They are required to consider the
situation and should take the decision that brings the best result to many people and not the only
few. The theory and its application can better understand with the help of an example. For
instance, if a decision of the board leads positive impacts to the profits of the company but
because of the same customer and environment is going to face loss then the board should not
take such decision as it is profitable for only a few and can prove adverse to many. Applying
Utilitarian theory of ethics in this case the decisions of directors does not seems to be ethical as it
will not lead the greatest good to grates number of people. In this mean Utilitarian theory wants
decision-makers to think about the results of their actions and to make the decisions thereafter
(Learning-theories.com, 2019). The second aspect of this theory is that the same present question
regarding most important groups of society while weighing the outcome. It means if while
considering the interest of majority groups, minority gets hurt then whether the same will be
ethical or not. The third objection of this theory is that the outcomes are non-predictable
(Pagecentertraining.psu.edu, 2019). One may not check the exact consequences of particular
actions and therefore even after applying this theory, a decision can prove wrongs. For instance,
in the last example decisions of director can be proved wrong under this theory only of the
results are not the same as expected. In most of the cases directors and officers of the company
do the things and take the decisions which are in the best interest of the company as their main
focus remain on profit only but this theory force term to think about other stakeholders that are
more in number and has great interest in the affairs of the company. This can be stated that
although the there is a risk while evaluating the possible consequences, this theory provides a
good way to deal with the situations where management of the company find itself unable to
decide that what should be done and what not.

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Relation of Banking Commission report and Utilitarian theory
As mentioned above, the commission provided its recommendations; in the following
part, the same will be reviewed. In its recommendations, the commission also focused on the
results and considered those actions ethical that bring positive results to a large number of
people. Many of the areas of the report are there where the Utilitarian theory of ethics does
reflect. Starting from section 1.2 of this report, the responsibility of misconduct lies with the
entities that did so. As these are the entities that committed misconduct and hence their senior
executive, managers, directors and other officers bear the responsibility of whatever happened.
Nevertheless, the report does not focused on these groups of people and consist many unfair
practices and recommendations regarding many others. Part 2 of the report is focused on
intermediated home lending and consist 7 sections from 2.1 to 2.7. Firstly, section 2.1 of the
report says that most of the times people take help of mortgage brokers while applying for home
loans in Australia. In such a scenario, needy people seek advice from brokers from which
financial institutions they should take a loan and it has been reviewed that such brokers suggest
them institutions that provide high brokerage often. Such brokers only think of their personal
interest setting aside the need of those people. The situation is so unfair. This advice may be
beneficial for the financial institutions but can prove wrong for the people who seek for a home
loan. The royal commission here recommends that these brokers should consider about the
ultimate results of their actions and should do the things that lead good to a massive number of
people or public at large. Broker creates an additional layer between the relationship of lender
and borrower and therefore should act responsibly. Not only the brokers but the act of lenders
also been question marked by banking commissions in its final report. As per the investigation
conducted by the commission, it has been seen that such lenders provide value based

Ethics and Governance 7
commission to brokers so that they recommend their organization to potential borrowers and
they get success too in this manner.
In the section 2.1.2 of the report, the commission said, that such value-based commission
is a form of conflicted remuneration. Further section 2.3 of the report states the best interest duty
of brokers. As per this section, brokers are required to act in the best interest of the potential
borrower. Further, as per the recommendation number 1.2 of the report, there should be a civil
liability on those brokers who do not act in the best interest of the borrower. Section 2.6 of this
report says that the aggregators are there that provides services to brokers and are remuneration
through lenders but the model should be changed and they should get remuneration from the
parties who value the services provided by them. Some other recommendations are also there.
For instance, as per recommendation number 1.3, brokers should be remunerated from the
borrower and not the lender so that they may get an independent advice free form the impact of
conflicted remuneration.
The recommendation of banking commission focused on the results of an action and
stated that the brokers as well as lenders should be fair in their dealings and should consider the
results of their actions. One may see the reflection of the Utilitarian theory of ethics here that
focus on consequences. The commission somewhere believes that if the end result of an action
will be good then the act of these parties cannot be wrong.
Part B
There are not the one or two entities of the financial and insurance sector of Australia that
been engaged in unfair and fraudulent practices but there total 11 entities have been identified
under final report presented by banking commission. This part of the report is focused on one

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such case study, which is mentioned under volume two of the final report of the commission.
The case study is related to Freedom Insurance Group Limited (Freedom). Banking commission
in its finding examined and evaluated the sales and marketing practices of the organization in
general and in particular cases. As per one of the cases related to misconduct by this
organization, the company sold the incorrect policy to a person. Mr. Stewart’s son was suffered
from Down syndrome. The son was not able to understand which product is expensive and which
one is cheap and therefore his parents were used to guide him on the matters related to finance.
One-day freedom insurance sold an insurance policy to the son of Mr. Stewart and when Mr.
Stewart contacted Freedom in respect to cancellation of the policy, the organization denied doing
so (Royalcommission.gov.au, 2019). When Mr. Stewart heard the recording of phone call
executed between his son and sale agent of freedom, it became clear that his son had no
understanding of policy that he purchased and freedom agent sold the policy fraudulently.
Apart from the above specific case too, many other cases were there where freedom
adopted unfair practices. It has been detected that it was in the practice of freedom agents to
manipulate the customers and to sell them unwanted products. The reason of such practices was
greed of organization, as it wanted to earn more and more profits. The incentive of salesperson of
the organization was based on the volume of sale and then it became a target of those personnel
to increase the sale of the company. In this manner, these people focused on remuneration and
incentives only setting aside everything else. This kind of behavior is common when it comes to
profit and wealth maximization. In order to regulate the behavior of professionals. Accounting
Professional and Ethical Standards 110 (APES 110) is there. These standards are applicable to all
CPA (Certified Practicing Accountant) members. This document set out the moral and ethical
principles, which is applicable to professional accountants of the country

Ethics and Governance 9
(Charteredaccountantsanz.com, 2019). The code is divided into three parts and targets to a
different group. Part A is applicable to every member and details the five basic principles as
below:-
 Objectivity: - According to this principle, members should not provide their services in
those cases where they believe that this can lead to some unethical practices (Sivabalan,
Sawyers, Jackson & Jenkins, 2016).
 Confidentiality: - As the name implies, this principle demands every member to act in a
confident manner and not to reveal secret information of the related business to an
outsider. Further, they should respect to Confidentiality factor of information that they
receive as a business.
 Integrity: - It is one of the significant principles which focuses on the honesty factors and
demands that the members should act in an integrated manner (International Monetary
Fund, 2012).
 Professional competence and due care: - The principle says that due care should be there
in the behavior of professionals. Further, in addition to care, competence should also be
there. Members are required to act diligently considering professional and technical
standards.
 Professional behavior: - Members are required complying laws and regulations while
performing their duties (Apesb.org.au, 2019).
If to see the conduct of sale personnel of freedom in relation to this code, then the
practices adopted by them does not seem to be ethical. Sales personnel of this organization did
not comply with any of the principles mentioned above. They were not integrated into their
operations, and also did not act professionally. They have adopted sales ways that were in total

Ethics and Governance 10
contradiction of APES 110. Where Part A provides principles, Part C provides a way in which
such a principle can be adopted in practice by members in the business. Here members in the
business refer to those people who are engaged or employed in commerce, regulatory bodies,
industry service or professional bodies. Further paragraph 10.13 provides certain safeguards that
are compulsory to have a look upon. These safeguards are mainly divided into two categories as
follows:-
 Safeguard that are created by regulation, profession, and legislation
 Safeguards that are developed by the work environment (Cpaaustralia.com.au, 2019).
According to the first safeguard, the risk of misconduct can be reduced by complying
with applicable regulations and standards. Further, the safeguards say that my mean of training
and education the risk can be reduced. Further as mentioned above, the second safeguard is
developed under work environment, this is to state that by communicating the required
information to respective people, making internal control within the corporation and by adopting
similar methods an organization can prevent misuses of misconduct. In this manner, the code is
all-inclusive and one may take all the assistance from there only.
Conclusion
sIn a conclusive way, this is to state that the morality of businesses is becoming a
necessity of these days. Customers have many other options and in the world full of competition,
businesses should think of the best interests of the stakeholder. In the report presented hereby the
focus was made of the Utilitarian theory of ethics and its relation with the Banking Commission
report. Banking commission tried to state that all the parties of a financial transaction should

Ethics and Governance 11
focus on the ultimate results of their actions and if they would act accordingly then the actions
will also be ethical. Further, in part B, the discussion was made on APES 110. The code is a set
of moral practices that is applicable to all the CPA members. Five important principles have been
discussed and it has been reviewed that why the conduct of Freedom was not ethical considering
the aspects of this conduct. Freedom adopted fraudulent sales and other business practices. At
last in this report, some safeguards have also been discussed by using which a company can
ensure ethical and fair working.

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References
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Retrieved From:
https://www.apesb.org.au/uploads/meeting/board_meeting/24112014043919_agenda-
item-16-f-cpa-australia-s-overview-of-apes-110.pdf
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http://caae.phil.cmu.edu/cavalier/80130/part2/sect9.html
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https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/ethics/an-overview-of-apes-110-code-of-ethics.pdf?la=en

Ethics and Governance 13
International Monetary Fund. (2012). Australia: IOSCO Objectives and Principles of Securities
Regulation—Detailed Assessment of Implementation. WashingtonInternational Monetary
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https://www.learning-theories.com/utilitarianism-consequence-based-ethics.html
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Perera, S. (2011). Corporate Ownership and Control: Corporate Governance and Economic
Development in Sri Lanka. UK: World Scientific.
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https://www.royalcommission.gov.au/sites/default/files/2019-02/fsrc-volume-2-final-
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Cengage AU.

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Verderber, R., F., Verderber, K., S. & Sellnow, D., D. (2014). COMM3. USA: Cengage
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