Business Ethics, Financial Integrity, and Corporate Governance

Posted on Nov 17, 2025 in Business Administration and Management (BAM)

Session 01: Ethics and Financial Reporting

HSBC Scandal: Tax Evasion and Money Laundering

  • 2007: HSBC employee Hervé Falciani leaked data showing the bank helped clients evade taxes and launder money.
  • USA: 400 clients had $13 billion in secret accounts to avoid paying taxes.
  • 2012: HSBC paid $1.2 billion in fines to settle charges in the U.S.
  • Bank’s Response: Promised to improve policies and prevent future fraud.

The Importance of Ethics in Financial Reporting

  • Financial reports are only useful if they are accurate and truthful.
  • Manipulating numbers is considered fraud and can destroy a company’s reputation.

Creative Accounting Versus Financial Fraud

  • Creative accounting adjusts numbers within legal limits but can turn into fraud.
  • Famous fraud cases include: Enron, WorldCom, Tyco, and Arthur Andersen.

Insider Trading: Illegal Use of Private Information

Insider trading happens when someone uses confidential company information to trade stocks.

Types of Insider Trading

  • ✅ Traditional Insider: A company employee misuses internal information.
  • ✅ Temporary Insider: Lawyers, consultants, or outsiders with access to confidential data.
  • ✅ Tipper & Tippee: A person leaks information to another who profits from it.

Key Functions of Financial Reports

  • ✅ Help investors and creditors make informed decisions.
  • ✅ Show a company’s real cash flow.
  • ✅ Identify a company’s assets and debts.

Auditing Conflicts of Interest and Accountability

The role of auditors is crucial, but conflicts can compromise objectivity:

  1. Auditor-Firm Conflict: Auditors may protect companies to keep lucrative contracts.
  2. Managers vs. Shareholders: CEOs may hide negative information from investors.
  3. Personal Interests vs. Ethics: Auditors with career ambitions may lack objectivity.

🚨 Consequences: Fake financial data, major fraud scandals, and severe legal penalties.

Cognitive Biases Affecting Auditing Decisions

  • 🔹 Selective Perception: Ignoring key financial red flags or contradictory evidence.
  • 🔹 Plausible Deniability: Justifying errors by claiming “lack of information.”
  • 🔹 Escalation of Commitment: Sticking to bad decisions to avoid admitting failure.

Sarbanes-Oxley Act (SOX, 2002)

The SOX Act was created after the Enron and WorldCom scandals to prevent corporate fraud and restore investor confidence.

Key Regulatory Changes Introduced by SOX

  • ✅ Public Company Accounting Oversight Board (PCAOB) created to regulate auditors.
  • ✅ Stronger control over external auditors.
  • ✅ CEOs and CFOs must personally certify financial statements.
  • ✅ Strict review of internal controls to prevent fraud.

Session 06: Ethical Leadership and Corporate Governance

1. Defining Ethical Leadership

  • A true ethical leader acts with integrity and encourages employees to follow ethical values.
  • Builds trust, respect, and decision-making based on moral principles.

2. Transformational Leadership Style

Transformational leadership involves setting a long-term vision that motivates employees to work towards shared goals.

Key Traits of Transformational Leaders

  • 🔹 Inspirational Motivation: Energizes and engages employees.
  • 🔹 Idealized Influence: Leads by example and acts as a role model.
  • 🔹 Individualized Consideration: Helps employees grow and develop personally.
  • 🔹 Intellectual Stimulation: Encourages innovation and problem-solving.

3. Transactional Leadership Style

  • Focused on short-term efficiency and control.
  • Uses rewards and punishments (contingent reinforcement) to manage employees.
  • Less inspiring, but effective for maintaining productivity and structure.

Session 07: Strategy, Culture, and Corporate Compliance

1. Integrating Ethics into Strategic Planning

Before making major business decisions, leaders should ask critical ethical questions:

  1. Is this really my responsibility? (Defining scope of accountability)
  2. What ethical concerns are involved? (Identifying risks)
  3. What would others think about my decision? (Stakeholder perspective)
  4. Am I staying true to my values? (Drucker’s Mirror Test)

2. Mechanisms for Changing Corporate Culture

Managers can change company culture using two main approaches:

  • ✅ Primary Mechanisms: Focusing on core ethical values and leadership behavior.
  • ✅ Secondary Mechanisms: Adjusting policies, organizational structure, and incentives.

Kurt Lewin’s Change Model

  1. Unfreeze: Challenge old beliefs and practices.
  2. Change: Implement new ethical values and behaviors.
  3. Refreeze: Make the change permanent and institutionalized.

3. Corporate Compliance and Accountability

Companies must ensure they follow all legal and ethical regulations by:

  • ✅ Assessing risks.
  • ✅ Implementing robust compliance programs.
  • ✅ Continuously monitoring and updating policies.

Session 08: Corporate Social Responsibility (CSR) and Sustainability

1. Defining Corporate Social Responsibility (CSR)

  • CSR means companies have an ethical responsibility to benefit society and the environment.
  • It helps build a positive reputation and strengthen relationships with stakeholders.

2. Major CSR Models and Frameworks

  • 📌 Classical Model (Milton Friedman): A company’s only goal is to maximize profits for shareholders.
  • 📌 Stakeholder Model (Edward Freeman): Focuses on balancing the interests of all stakeholders (employees, customers, community, etc.).

The Triple Bottom Line (TBL)

Companies must focus on three key areas (People, Planet, Profit):

  • ✅ Economic (Profit): Profitability achieved without unethical practices.
  • ✅ Social (People): Employee well-being and positive social impact.
  • ✅ Environmental (Planet): Reducing pollution and promoting sustainability efforts.

3. Examples of Companies with Strong CSR Programs

  • 🌍 Patagonia: Promotes recycling and responsible consumerism.
  • 🚗 Tesla: Focuses on clean energy solutions and sustainable transportation.
  • 🍃 Unilever: Reduces waste and supports sustainable sourcing across its supply chain.
  • 🏡 IKEA: Uses renewable energy and eco-friendly materials in production.