Chapter 9: Ethical Decision Making Models Page 49

Ch # 9 Ethical Decision Making Models

Business Ethics

▪ Ethics, also called ‘moral philosophy’ is a branch of Philosophy that defines and explains the
concepts of right and wrong values, good and bad conduct, just and unjust decisions.
- Should accountant conceal figures in annual report to make company look profitable ?
- Should doctor donate organs of deceased person without his prior consent ?
- Does manufacturing and selling cigarettes count as an ethical business ?
- Should media companies advertise products that are injurious to health ?
- Should lawyers continue to defend the suspect after knowing that he is guilty ?
▪ Ethics is a vast subject and has numerous definitions with varying nuances e.g:
- “It is a set of moral principles or values”
(This is relatively subjective since moral values vary from person to person)
- “The principles, norms and standards of conduct governing an individual or group.”
(by Trevino and Nelson)
▪ Manuel Velasquez states that there are no ethical standards that are true absolutely, i.e.,
that the truth of all ethical standards depends on what a particular culture accepts.
▪ In organizations, rules of ethical conduct are developed that include corporate values,
norms of dealing with suppliers and customers, professionally accepted behavior, gift
policies, and other rules as to what is allowed or not within the working premises.

Business sense of ethical culture

A high ethical standing in corporate world consequently takes businesses to path of increased
profits and growth. Whereas organizations inclined towards unethical practices are doomed.

Business committed to ethical behavior builds positivity in its relationship with employees,
customers, investors, general public & other stakeholders and bring following benefits:
▪ Employees commitment
- Employees trust that company is working for benefit of its employees and public
- Employees who feel that their employer is not following ethical standards are more
likely to break ethical code of conduct and compromise on company’s values
▪ Investor confidence
- Investors mainly look for financial fundamentals but they also look for a company that
not just has a large market size but also is strong on ethical ground.
- They understand that ethical culture within a company provides the right foundation
and growth for the company in the right direction.
- An organization without ethical standards is exposed to many risks and issues such as
lawsuits, bad reputation, and loss of customers and profits.
▪ Customer satisfaction
- A company’s revenue comes from its customers
- Long lasting relationship can only be built when the customer has trust in company
▪ Avoiding loss of profits
- Unethical decisions potentially lead to significant loss along with other litigations.
Chapter 9: Ethical Decision Making Models Page 50

Ethical issues and dilemmas in business

▪ In normal circumstances, there is a clear distinction between what is right and wrong
▪ On the other hand, there may be a situation when a problem requires an individual, group or
organization to choose among several wrong or right actions
▪ Ethical dilemmas arise when norms and values are in conflict, and alternative possibilities
lie within the two extremes of right and wrong.
- These alternatives are not entirely right and wrong but fall somewhere in between.
- Ideally, this means selecting an option that is the best among all the possibilities.
- In such situations, the decision is based on the acceptability level of an individual.
- Here decision maker is trapped in a state of confusion and needs guidance to follow.
- For example, we all know that it is wrong to kill people but is it wrong to kill criminals.
(In above example, between the two extremes comes the middle ground i.e. prisons)

“An ethical issue is a problem, situation or opportunity that requires an individual, group or
organization to choose among several actions that must be evaluated as right or wrong, ethical or
unethical” (Definition by Fraedrich and Ferrell)

Guidance on ethical issues

▪ Guiding principles for ethical decision making for a chartered accountant in Pakistan are
given in ICAP Code of Ethics
▪ Additionally 2 frameworks for ethical decision-making are:
- American Accounting Association (AAA) model
- Tucker's 5-question model
Chapter 9: Ethical Decision Making Models Page 51

FRAMEWORKS FOR ETHICAL DECISION MAKING

American Accounting Association (AAA) model

American Accounting Association (AAA) model originates from a report by Langenderfer and
Rockness in 1990. In the report, they suggest a, 7-step process for decision making

Step 1- Establishing the facts of the case.

▪ When decision-making process starts, there is no ambiguity about subject of the case
▪ Leading questions about the facts will revolved around What? Who? Where? When? How?
▪ Efforts are made to identify what we know or need to know, to clearly define the problem.

Step 2- Identify the ethical issues in the case.

▪ Examining the facts of the case and asking what ethical issues are at stake.
▪ All threats to compliance with fundamental principles are identified and explained.

Step 3- An identification of the norms, principles and values related to the case.
▪ Placing the decision in its social, ethical and (sometimes) professional behaviour context.
▪ In last context, professional codes of ethics or the social expectations of the profession are
taken to be the norms, principles and values.

Step 4- Each alternative course of action is identified.

▪ Compiling a complete set of major practical alternatives one can make in a given situation.
▪ Alternatives should not consider the norms, principles and values identified in Step 3.
▪ It is expected that in these alternatives one may feel or see some form of compromise

Step 5- Matching norms, principles, and values to options

▪ Norms, principles & values (Step 3) are matched with different alternate options (Step 4)

Step 6- The consequences of the outcomes are considered.

▪ An analysis of implications and consequences of each possible alternate course of action.
▪ Should be analyzed in all respects: short and long run, positive and negative.

Step 7- The decision is taken.

▪ Final decision requires application of professional judgment
(i.e. an application of accumulated knowledge and experience gained during initial
professional development and through continuing professional development)
▪ Decision taken should demonstrate that selected option is well-informed ethical decision.
Chapter 9: Ethical Decision Making Models Page 52

Tucker provides a 5-question model

Model is used to identify best possible choice to make for shareholders and other stakeholders
These questions are to be responded in following order to assess the value shown against each:

Questions Values
Is it profitable? Market values
Is it legal? Legal values
Is it fair? Social values
Is it right? Personal values
Is it sustainable development? Environmental values

▪ Generally, it happens that we immediately think of an obvious course of action that comes
first to our mind (first order thinking)
▪ The Model leads us to second-order thinking.
▪ We re-think the facts and reframe the problem and create more than 1 course of actions

Value judgment

▪ This value analysis helps us to make a balanced decision for all stakeholders.
▪ The Tucker Model may be explained by understanding the following two approaches:

1) Utilitarianism (or End-Point Ethics)

- To determine whether an action is right or wrong, one must concentrate on its likely
consequences, the end point or end result.
- Seek the greatest benefit for the greatest number of stakeholders.
- This obviously requires some compromises for certain segments of stakeholder.
- The first question of the Model is directed to see the problem in the context of utility of
the decision, before analysing it on ground rules and ethical principles.
- If we look at a problem from perspective of each of 5 boxes on the chart, we might get
some creative alternatives which might not come to mind if only 1st box is considered.

2) Rule ethics

- Rule ethics intends to follow the duty and norms relevant to the problem.
- Intended decision is assessed on the basis of law of the land, or company’s stated
policies or any professional code applicable on the matter.
- It appears easier to see the decisions as right or wrong on the basis of its legal value.
- All legally right decisions may not produce social, personal, value for ethical decisions.