Analysis of Business Ethics and Governance: A Case Study Report

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This report provides an analysis of business ethics and governance, focusing on the Banking Royal Commission's findings and their implications. It begins with an executive summary and introduces the concept of business ethics, highlighting the importance of ethical conduct in the business world, especially in light of recent misconduct cases in the Australian banking and insurance industries. The report delves into ethical theories, specifically the Utilitarian theory, and its relevance to the Banking Royal Commission's recommendations. It examines the commission's report, emphasizing the importance of acting in the best interest of all stakeholders. The report then explores the APES 110 Code of Ethics for Professional Accountants, discussing its principles and application. A case study on Freedom Insurance is presented, illustrating unethical sales practices. The report concludes by summarizing key points and emphasizing the importance of ethical governance in the business environment.
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Running Head: BUSINESS AND CORPORATION LAW 0
Ethics and Governance
4/21/2019
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Ethics and Governance
1
Executive Summary
Ethics can be understood as the set of principles that govern the behavior of the
individual. Business ethics is a branch of ethics that provide a moral rule for businesses. This can
be understood as professional ethics or a form of applied ethics. Business ethics is important for
each kind of businesses and recently many of the cases have reported where banking and
insurance companies of Australia misconducted in their practices. In the presented report, one of
such case has been reviewed. In addition to this the report also highlighted the recommendations
made by subjective commission and ethical theory related to the same.
The report also evaluated the APES code of ethics. Part a and c of the code has been
discussed and at last of the report a conclusion is provided that highlighted the key points of the
report.
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Contents
Introduction......................................................................................................................................2
Part A...............................................................................................................................................3
Ethical Theory 3
Report of Banking Royal Commission and Utilitarian theory 4
Part B...............................................................................................................................................6
Conclusion.......................................................................................................................................9
References......................................................................................................................................10
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Introduction
A business is administrated by certain people who deal with other parties on behalf of the
business. In this manner, it becomes the responsibility of such people to administer the business
considering the moral principles. With the changes in time and globalization, the expectation of
society is increasing with the businesses. Here the meaning of business ethics is related to a code
of conduct, which every organization is required to follow in their practices. This helps the
organizations and their administrators to understand the difference between good and bad actions
and enlighten their path towards the adoption of good and ethical practices.
Royal Commission into Misconduct in the Banking, Superannuation, and Financial
Services Industry is a royal commission that inquiries into the matter if subjective industry. On
Friday 1 February 2019, this commission presented its final report to the governor general
(Jaf.Ministers.Treasury.Gov.Au, 2019). In its investigation banking commission found many
cases where banking companies misconducted and in its final report, these cases, cause of the
same and recommendations for the same has been summarized. There are two parts of the
presented report. In the first part, the discussion will be focused on the message that the banking
royal commission provided in its final report in addition to the related ethical theory. In the
second part of the report, the discussion will be made on the APES 110 Code of Ethics For
Professional Accountants and other related aspects.
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Part A
Ethical Theory
Ethics is a subject that consists of many of the theories that give different principles.
These theories are namely Deontology, Virtue theory of ethics, Utilitarian theory, and many
others (Pagecentertraining.psu.edu, 2019). The final report made by Banking Royal Commission
underpins the Utilitarian theory of ethics. This policy makes its focus on results and
consequences (Ethicsunwrapped.utexas.edu, 2019). In simple word, this is to state that under this
theory an act is considered ethical if the same brings good results for everyone. It means the
theory extends the interest of one and thinks about the interest of all (Caae.phil.cmu.edu, 2019).
The theory says that a person should do the act that produces the best possible consequences for
everyone. A person named Jeremy Bentham established this theory. David Hume, Henry
Sidgwick, and many other moral philosophers are also associated with this theory. Based on the
results of the actions, this theory determines whether the action of an organization is right or
wrong (Learning-theories.com, 2019).
In context of a business, many of the stakeholders are there and Utilitarian theory
demands the best result for all from an organization. The same can be understood in a way that
an action is considered wrong when the same does not bring maximize good result for all.
Administration of every business is required to be responsible for their actions. Many day-to-day
activities are there, which the officers and administered carries on but they must consider the
ultimate results of the actions. It is very general that profit is the main motive of organizations
these days, but the directors, officers, and managers of the business should not only consider this
factor.
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The selected theory believes that actions may be wrong sometimes but if the same carries
positive results for many of the people, then these actions are allowed (Ethics.iit.edu, 2019). This
theory can be understood by an example. For instance, if a drug is restricted under a government
policy but can prove beneficial for many people then according to the Utilitarian theory, an
organization should issue the drugs to the public. In this manner, the actions of the organization
will be illegal but the result of such action will lead the greatest good to the greatest number of
people, which will be ethical. Managers of business always have options while making a
particular decision on behalf of their business, many of them consist of ethical actions.
Nevertheless, all ethical actions do not provide good results. Following the ethical actions only
and without considering the final results of those actions, an organization cannot achieve the
level of ethics in their practice.
Certain limitation of this theory is also there such as an unpredictable future. One cannot
predict the future and therefore the same cannot say with confidence whether the action will be
bad or good. The theory also has issues evaluating individual rights and justice. Hence, in a
summarized manner this can be stated that although this theory is the most reason-based
approach to determine wrong and right, yet the same has certain limitations.
Report of Banking Royal Commission and Utilitarian theory
In order to understand this theory in the context of the royal commission report, this is to
state that commission in its report tried to give the message that the organizations should adopt
the practices that lead the greatest good to the greatest number of people. For instance, in section
2.1 of the report, the commission stated that the mortgage broker provides many pieces of advice
to their customers but they should consider the interest of all. It means a bit of advice can be
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beneficial for others but may prove wrong for others and in such as a situation the organizations
should consider all the factors. Further, the holder of the Australian Credit License should act
fairly and they need to ensure that the customers do not face any disadvantage by any kind of
conflict of interest in relation to the credit activities carried out by licensee or his/her
representative. Not only the institutions/lender but also mortgage brokers are also important
parties in case of mortgage and loan structure that influence the choices of customers.
Commission found in its report that many of the times lenders offer value based commission to
the brokers that are a form of conflicted remuneration. This influences the decision of brokers
and they recommend the customers those lenders that provide more remuneration to them
irrespective of the interest of customers. It is recommended by the banking commission that the
law is required to be amended to the provision that mortgage brokers must act in the best
possible interest of the intending borrower while doing the actions in connection with home
lending.
Further, it has also been recommended that this obligation must consist of a civil liability
provision. This recommendation believes that if the brokers would act in the best interest of the
borrowers then the practice of them will automatically be ethical and there will be very fewer
cases where a broker act in a way which sees that lenders gave incomplete or wrong information
about the creditability/ financial situation of applicants. It again reflects the Utilitarian theory of
ethics as it focuses on the ultimate results of an action considering the greatest good of society
and think that actions will be ethical if the result will be. Banking Royal Commission in its final
report highlighted the three points in relation to the mortgage brokers. The first point is
conflicted remuneration that influences the choice of lender. Another point is that a borrower
who engages the mortgage broker look after him/her for the advice and in this manner the
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interest of brokers get conflicted with the interest of the client (borrower). The last and third
point is that the changing to a system where borrows would pay the commission instead of
lenders will reduce the number of cases where borrower engages a broker (Treasury.gov.au,
2019a). When the number of such cases would be reduced then the brokers will go out of
business and their role will be diminished. Considering the consequences, it has been
recommended by the banking commission that the consideration of broker should be pay by the
borrower and not the lender as it can reduce many negative activities and misconduct form the
markets. All the other recommendations provided by the banking commission also focused on
the results and they believe that the result should be ethical and then the activities will be ethical
itself. In this manner, the Utilitarian theory of ethics can be reflected in the findings and
recommendations made by banking royal commission.
Part B
As mentioned above, many of the cases have happened there where the banking and
insurance companies in Australia found to be engaged in misconduct. The final report presented
by this commission consisted of these case studies. In order to discuss one of the significant case
studies, this is to mention that in the 6th round of hearing, common examined the retention and
sales practices of identified firm in general terms as well as in terms of the customer The case is
related to the firm named Freedom insurance. Firstly to discuss the sales practices in an
individual term, this is to say that a customer who was suffering from the Down syndrome asked
for an insurance policy to the firm and firm provided him accidental death insurance policy
where he was not intended to take the same. The sales staff of the firm forced the subjective
customer to but the respective death insurance policy of the company, which was a total waste
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for him. The sale agent of the firm had an idea about the intention of the customer. The same
knew that that the customer wants insurance covers for his illness and not for the risk of an
accidental claim, yet after knowing all the facts, the agent induced the customer to enter into a
purchase contract of accidental death policy. This was not the only case where this entity
performed fraudulent sales activities. The above-discussed incident is one of many. Afterward, it
has been founded that it was in the practice of the company to sell the insurance policy and
products to customers in a fraudulent manner neglecting their requirements and other factors.
The mentioned business i.e. Freedom insurance itself accepted that the same adopted
deceptive sales tactics and practices and sold the products to vulnerable customers
(Treasury.gov.au, 2019b). The lead motive behind these sales practices was the incentive of staff
of sales department. They were used to get more incentives according to the volume of sales and
therefore they focused to increase the sales in any manner.
Accounting Professional and Ethical Standards 110 (APES 110) is a document, which
provides the manner of working in an ethical manner. This can be understood as a guide of ethics
for the professional accounts of the country. The code is divided into three parts, which sets out
different principles and are applicable to different workgroups. Starting from part A of the code,
this is to say that the same has general application to all the members. This part provides five
major principles as follow:-
Integrity: - As per this principle, all the members are required to be honest in all business
and professional relationship. Further, the principle says that a member to whom this
code is applicable should not be a part of those communications or reports where they
believe that the same can be misleading or omitted (Trotman & Carson, 2018).
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Objectivity: - This principle demands the members not to render their services where the
same can be under the influence of others (Romney, Steinbart, Mula, McNamara, &
Tonkin, 2012).
Professional competence and due care:- According to this principle, all the members
should follow the professional and technical standard while performing their services.
Confidentiality: - The members of the firm must not expose the information about their
business with third parties (Frost & Sutherland, 2017).
Professional behavior: - All members must behave professionally and adhere to the
applicable rules and regulations.
All these principles are required to be there in practice but Freedom insurance seems to
be failed in the application of it. The members did not adopt practices mentioned under this code
and therefore the practices adopted by them created an ethical issue. The sales personnel of the
entity breached the principles of Integrity, due care and Professional behavior in its practices.
The sales staff should not have adopted aggressive and inappropriate sales tactics as the same is
in against of APES 110. In addition to the principles, certain safeguards have also been provided
by this code, which is mentioned under Part C.
This is to state that the part C of the code exists in support of part A. Part C provides a
manner in which the framework and principles given in Part A can be adopted in practice (CCH
Australia Limited, 2009). This part is applicable to the members who are engaged in the business
and says that all the stakeholders of business may rely on members for the reporting of financial
and related information. According to this part of the code, a salaried person can also be a
member of the business. Two types of safeguards are there, one is created by regulations,
profession, and legislation and another one is by development in the work environment.
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First, safeguard includes the development of professional standards, corporate
governance regulations, mentioning training and education requirements for various roles, by
developing well-publicized complaint systems and so on (Moroney, Campbell & Hamilton,
2012). As per the second safeguard, the threat of unfair practices can be reduced while adopting
many measures such as by adopting appropriate disciplinary processes, making internal control
strong, communicating employing organization’s policies timely, and consulting with another
appropriate Member and so on (Apesb.org.au, 2019). Being a member of CPA Australia all these
safeguards are available to an individuals and one may use them for preventing the ethical issues.
Conclusion
In order to conclude this report this is to state that the business ethics is important aspect
of each business these days and managers of the business must adhere to the principle of good
governance. Banking Royal Commission conducted investigation in the sector of banking and
insurance services firms and found many misconducts. The commission submitted its final report
to governor general that provided recommendations. All these recommendations are focused on
the consequences and believe that if consequences will be ethical then the actions will be
irrespective. Here the Utilitarian theory of ethics reflects. In addition to this theory and its
relevance to the final report presented by banking royal commission, one case study also been
discussed where the company was involved in deceptive sales tactics. APES 110 is the set of
ethical principles and provides certain safeguards. In this report this safeguards also have
discussed in conjunction to the manner in which they can be used to prohibit the ethical issues in
the entities.
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References
Apesb.org.au. (2019). APES 110 Code of Ethics for Professional Accountants. Retrieved From:
https://www.apesb.org.au/uploads/standards/apesb_standards/standardc1.pdf
Caae.phil.cmu.edu. (2019). Utilitarian Theories. Retrieved From:
http://caae.phil.cmu.edu/cavalier/80130/part2/sect9.html
CCH Australia Limited. (2009). Australian Master Accountants Guide. Australia: CCH Australia
Limited.
Ethics.iit.edu. (2019). Ethical Theories. Retrieved From: http://ethics.iit.edu/teaching/ethical-
theories
Ethicsunwrapped.utexas.edu. (2019). Utilitarianism. Retrieved From:
https://ethicsunwrapped.utexas.edu/glossary/utilitarianism
Frost, M. & Sutherland, E. (2017). Bookkeeping: An Integrated Approach with Student Resource
Access 12 Months. Australia: Cengage AU.
Jaf.Ministers.Treasury.Gov.Au. (2019). Arrangements for the release of the final report of the
Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry. Retrieved From: http://jaf.ministers.treasury.gov.au/media-release/006-
2019/
Learning-theories.com. (2019). Utilitarianism (Consequence-Based Ethics). Retrieved From:
https://www.learning-theories.com/utilitarianism-consequence-based-ethics.html
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Moroney, R., Campbell, F., & Hamilton, J. (2012). Auditing, Google eBook: A Practical
Approach. John Wiley & Sons.
Pagecentertraining.psu.edu. (2019). Ethical Theories. Retrieved From:
https://pagecentertraining.psu.edu/public-relations-ethics/introduction-to-public-relations-
ethics/lesson-1/ethical-theories/
Romney, M., Steinbart, P., Mula, J., McNamara, R., & Tonkin, T. (2012). Accounting
Information Systems Australasian Edition. Pearson Higher Education AU.
Treasury.gov.au. (2019a). Final Report. Retrieved From:
https://treasury.gov.au/sites/default/files/2019-03/fsrc-volume1.pdf
Treasury.gov.au. (2019b). Final Report. Retrieved From:
https://treasury.gov.au/sites/default/files/2019-03/fsrc-volume-2.pdf
Trotman, K., & Carson, E. (2018). Financial accounting: an integrated approach. Cengage AU.
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