Corporate Governance:

An Introduction

Notre Dame of Dadiangas University

Business College – Accountancy Program

Module Prepared by: Prof. Jon Leo J. Licayan, CPA

Corporate Governance, defined
The OECD says corporate governance is a:
• …set of relationships between a company’s directors, its
shareholders and other stakeholders.
• …structure through which the objectives of the company are set,
and the means of obtaining these objectives and monitoring
performance.
Corporate Governance, defined
The IIA says governance is:
• …the system by which a company is controlled and directed.
Governance includes the rules and procedures for making
decisions on corporate affairs to ensure success while maintaining
the right balance with stakeholders’ interest.
• Governance is the leadership and direction given to a company so
that it can achieve the objectives of its existence.
Corporate Governance, defined
Cadbury Report of 1992 said:
• Corporate Governance is the system by which organizations are
directed and controlled.
Breakout Room Discussion
• In your respective breakout rooms, discuss the systems that you
have observed in order direct and control the operations of Royal
Flora Holland.
• From your shared observations:
1. Identify at least 3 benefits of corporate governance.
2. Identify at least one “possible downside” of governance.

Breakout Room Rules:

1. Identify your facilitator, time-keeper, and documenter/s.
2. Time-limit for breakout room discussion is only 15 minutes. 5 minutes
brainstorming, 7 minutes discussion, and 3 minutes wrap-up.
3. All learners are encouraged to participate in the group discussion as the
presenters will be identified randomly.
Benefits of Corporate Governance
1. Improved risk management system.
2. Clear accountability for executive decision making.
3. Focuses management attention on introducing appropriate
systems of internal control.
4. Encourages ethical behavior and a CSR perspective.
5. Safeguard the organization from the misuse of assets and
possible fraud.
6. Attract new investment into a company.
7. Put limits on excessive director remuneration.
Downside to Governance
1. Develop an excessively risk adverse culture amongst mangers.
2. Too much reporting and not enough time to seek and pursue profit
making activities.
3. Damper entrepreneurial activities.
4. Too much excessive supervision, red tape and bureaucracy.
5. Cost of operating internal controls exceeds any possible benefits.
6. Possibility that the focus on meeting different stakeholder
expectations will confuse management as to their corporate
responsibilities.
CORE PRINCIPLES OF CORPORATE GOVERNANCE
Qualities that best Qualities that ensure honest
decisions are made. and transparent disclosures

• Integrity • Transparency
• Fairness • Honesty
• Judgement • Responsibility
• Independence • Accountability
• Skepticism • Innovation

• Reputation
Framework by BPP Learning Media. Approved by ACCA
CORE PRINCIPLES OF CORPORATE GOVERNANCE
• Integrity
• Behaving in accordance with high standards of behavior and a strict
moral or ethical code of conduct. Honesty in all dealings.
• Fairness
• Respecting the rights and views of all groups with legitimate interest.
Balanced view.
• Judgement
• Being able to make complex judgments with objectivity in the interest
of the organization. Decisiveness.
• Independence
• Free from bias, undue influence or conflict of interest. Independence
in mind and in appearance.
• Skepticism
• Considering all parts of the business with an open mind. No
preconceptions.
CORE PRINCIPLES OF CORPORATE GOVERNANCE
• Transparency
• Full disclosure of material matters which could affect the decision of the
stakeholders.
• Honesty
• Truthful and not misleading disclosures.
• Responsibility
• Acknowledgement of praise or blame. Open management for errors and
failures.
• Accountability
• Having to answer for the consequences of actions and knowing who that
relates to. Accountability to all stakeholders.
• Innovation
• Openness to change and governance must stay fit for purpose regardless.
• Reputation
• Stakeholders’ perception to the organization.
Research 1
Research about the Interests or Roles of the following Internal and
External Parties in Corporate Governance
1. Board of Directors
2. Corporate Secretary
3. Management
4. Employees
5. Unions
6. Shareholders
7. External Auditors
8. Regulators
9. Government
10. Stock Exchanges
11. Potential Investors
Agency Relationship
and Theories

Notre Dame of Dadiangas University

Business College – Accountancy Program

Module Prepared by: Prof. Jon Leo J. Licayan, CPA

Agency, defined
• Civil Code of the Philippines:
• “Art. 1868. By the contract of agency a person binds himself to
render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter.
(1709a)”
Accountability

Employs To perform
PRINCIPAL AGENT SERVICE

Benefits
Agency Theory
• This theory is used to study problems of motivation and control
when a principal needs the help of an agent to carry out activities.

SELF-INTEREST SELF-INTEREST

Appoints Access

PRINCIPAL AGENT DETAILED

INFORMATION

Framework by BPP Learning Media. Approved by ACCA

Breakout Room Discussion
• In your respective breakout rooms, discuss why the shareholders
should be concerned about how the management is running their
company.
• From your shared observations:
1. Identify at least 2 issues that they must be concerned
about.

Breakout Room Rules:

1. Identify your facilitator, time-keeper, and documenter/s.
2. Time-limit for breakout room discussion is only 15 minutes. 5 minutes
brainstorming, 7 minutes discussion, and 3 minutes wrap-up.
3. All learners are encouraged to participate in the group discussion as the
presenters will be identified randomly.
 Agency Theory
• Conclusion: Shareholders incur Agency Costs for hiring
managers to run the company.

Cost of Bonding Residual Agency

Monitoring Costs Loss Costs

Costs to monitor Costs to provide Costs to the

the actions and incentives to shareholders of
performance of managers to act management
management in the best decisions that are
interest of the not in the best
company interest of the
shareholders
Transaction Cost Theory
• This theory is based on the idea that companies have to decide
which activities are needed to be performed “in house” and
which activities it can buy from external sources.

• Proponents of this theory argue that managers makes decision

based on a combination of bounded rationality and
opportunism.
• Bounded Rationality – Managers will tend to play safe
because they have limited understanding of alternatives.
• Opportunism – Managers makes decision based on their own
personal interests.
Transaction Cost Theory
Common Reasons for Vertical Integration:
• Reduce uncertainties about dealing with suppliers
• Avoid high purchase prices
• Manage Quality

Common Motivations of Managers to Support Vertical Integration:

• Amount that they will personally gain
• Probability of unethical behavior being discovered
• Extent to which actions are tolerated or encouraged
Stakeholder Theory
• Stakeholders are people, groups or organizations that can affect
or be affected by the actions or policies of an organization.

• Classification of Stakeholders as to Proximity:

Stakeholder Group Members
Internal Employees, Management, Board of Directors
Connected Shareholders, Customers, Suppliers, Creditors
External National Government, Local Government, Public, Pressure
Groups, Media, Competition, Trade Unions
Stakeholder Theory
Level of Interest
Low High

Weak

Ignore Keep Informed

Power

Keep Satisfied Key Players

Strong

Mendelow’s Power Interest Matrix

Stakeholder Theory
Problems with Stakeholder Theory
1. Managers might jeopardize the profitability of the company to fulfill
responsibilities to all stakeholders.
2. Stakeholders have divergent interests that may be difficult to
reconcile.

Points to be considered with Stakeholders

Instrumental View
• View stakeholders based on the economic benefit that the
company can derive from them.
Normative View
• The Company has moral obligations to all type of stakeholders
Reflection 1
Look into the Case of Deepwater Horizon Oil Spill and
identify whether the management of BP Company or
Transocean has accountabilities to their shareholders, as
their agents, and other stakeholders over the incidence.
PARTIES IN CORPORATE
GOVERNANCE

Notre Dame of Dadiangas University

Business College – Accountancy Program

Module Prepared by: Prof. Jon Leo J. Licayan, CPA

Internal Parties External Parties
Board of Directors Shareholders

Corporate Secretary External Auditors

Regulators
Management
Government
Employees Stock Exchanges
Unions Potential Investors

STAKEHOLDERS’ INTERESTS

CORPORATION
Internal Parties
Board of Directors
• Composed of Executive and/ or Non-Executive Directors of a
Corporation.
• Responsible in overall Corporate Governance, hence it is their
responsibility to develop corporate policies and strategic directions.
• Plays the role in ensuring that the company is achieving its corporate
objectives.
Corporate Secretary
• Responsible in proving relevant, reliable and timely information to all
directors, which is crucial when making corporate decisions.
• Acts as advisor of the Board, hence expertise on the applicable
regulations and corporate governance is a must.
• Acts as liaison between the Board of Directors and Management
Internal Parties
Management (Sub-Board Management)
• Composed of Operational Managers of a Company that are not members of
the Board.
• Responsible in implementing the Corporate Policies and Strategies set by
the Board;
• Develops tactics and procedures to ensure smooth flow of day-to-day
operation of the company.
Employees
• Performs the tactical plans and procedures of the Management.
• Responsible in complying with the corporate governance systems in place,
and report back to the management if ever the system or some of its parts
are not working well.
Unions (Employees/ Trade Unions)
• Responsible in protecting the interests of the employees.
External Parties
Shareholders
• As principal owners of the company, it is the responsibility of the
Board and Management to protect their rights and interests.
• Collectively, they have the power to alter, disregard or rectify the
decisions or policies made by the board.
External Auditors
• Engaged in corporate governance system to ensure that the
company present reliable and accurate information, especially those
pertaining to finances.
• Helps in promoting good corporate governance not only through the
opinions that they issue but also through the recommendations they
provide in order to strengthen internal controls.
External Parties
Regulators
• Ensure that the company is operating in accordance with applicable
laws, rules and regulations.
• The Securities and Exchange Commission (SEC), in the
Philippines, supervises the corporate sector through the Policies
they issue and recommendations they make on issues concerning
the securities market as well as advise Congress and other
government agencies on all aspects of the securities market.
• The Cooperative Development Authority (CDA), in the
Philippines, is the agency tasked to promote the viability and growth
of cooperatives as instruments of equity, social justice and economic
development in the country.
External Parties
Government
• The Congress, as a legislature, has the power to create laws
that will push corporate boards to take more responsibility of
the actions that they are doing.
• They have the ability to expand or limit the powers vested upon
regulatory agencies to make sure that they are doing their
tasks effectively as regulators of corporate entities.
• Local Government Units pursuant to the delegated power
given to them has the power to tax and regulate some of the
activities of corporate entities primarily to promote the general
welfare of their constituents.
External Parties
Stock Exchanges
• Generally, stock exchanges are organized to allow companies
to raise capital from a large pool of investors and to provide
a market for investors to later sell their shares in those
companies.
• As these companies are privately owned, they have to strictly
abide and has to require publicly listed companies to abide by
government regulations to protect their reputation as a stock
exchange firms.
External Parties
Potential Investors
• Could be small individual investors or institutional investors.
• Institutional investors are organizations with large pool of funds
coming from several individual investors specifically intent
ended to be invested either in securities, bonds, real properties
and other investment assets.
• Under extreme circumstances, institutional shareholder has the
power to intervene more actively in another company by using
its voting power to unseat the board.
The Board under
the Spotlight

Notre Dame of Dadiangas University

Business College – Accountancy Program
Module Prepared by: Prof. Jon Leo J. Licayan, CPA
The Board, defined
Title III, Section 23 of the Corporation Code of the Philippines
provides that:
“… the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board
of directors or trustees..”
Board of Directors vs. Trustees
BOARD OF DIRECTORS BOARD OF TRUSTEES

Public or private companies Non-stock, non-profit or charitable

Institutions

Affiliation to the entity is through No shares issued; Affiliation to the

ownership of shares. entity is through membership.

Elected from among the holders of Elected from among the members.
stocks

Any director who ceases to be the Trustees of non-stock corporations

owner of at least one (1) share of the must be members thereof.
capital stock of the corporation of which
he is a director shall thereby cease to
be a director.
Roles and Responsibilities of the Board
As primarily responsible in Corporate Governance of a company,
collectively, the board has to:
1. Promote the success of the company.
2. Provide leadership and direction for the company.
3. Manage risks and instituting the appropriate systems of
internal controls.
4. Supervise lower levels of management and employees.
5. Set the strategic goals and targets of the company.
6. Ensure that the necessary financial and human resources are
in place.
7. Review management’s performance.
 Unitary vs. Two-Tier Board
Unitary (One-tier) Board Two-Tier Board
Composition Single body board composed of A Supervisory Board is elected by the
Executive (Management) and Non- Shareholders, composed of Non-Executive
Executive Directors (Independent Directors (NEDs) who will be responsible in
External Directors). overseeing the Management Board,
composed of Executive Directors.
Segregation of No clear separation of duties as both Two different boards are present, with one
Roles the executive and non-executive clearly responsible for undertaking
directors sit on the same board management roles and the other for the
purposes of check and balance and policy
making
Decision- Making Decision making is faster. Decision making makes more bureaucratic
as decisions of Management Board needs
to be approved by Supervisory Board
Leadership The CEO of the Company sits as a Supervisory Board is led by the Chairman,
member of the board but not while Management Board is led by CEO
necessarily its Chairman.
 Responsibilities of Chairman vs. CEO
Chairman of the Board of Directors Chief Executive Officer
Provide leadership to the board, ensuring its effectiveness Provide leadership to the business, ensuring the
and setting its agenda. effectiveness of business operations and setting strategy.
Ensure the board receives accurate and timely Provide accurate and timely information.
information.
Ensure effective communication with shareholders and Communicating effectively with significant stakeholders.
that their views are communicated to the board as a
whole.
Facilitate effective contribution from NEDs, and ensure Facilitate effective implementation of the board decisions.
constructive relations between Executive and NEDs
Take the lead in providing an induction programme for Cooperate in the induction and CPD.
new directors and continuing professional development
program for the board
Meets with the NED without Executives present. Cooperate by providing any necessary resources

Facilitate board appraisal Cooperate in board appraisal

Encourage active engagement by all members of the Cooperate with all members of the board
board
Executive vs. Non-Executive Directors
Executive Directors
• Directors who have executive management responsibilities.
• Normally full-time employees of a company.
Non-Executive Directors (NEDs)
• Directors who do not have any executive management
responsibilities.
• They are not employees of the company, nor working with
them full-time.
Roles of Non-Executive Directors
1. Contribute to, and challenge the direction of, strategy.
2. Scrutinize the performance of management in meeting goals and
objectives, and monitor the reporting of performance.
3. Satisfy themselves that the financial information is accurate and
that financial controls and systems of risk management are
robust.
4. Responsible for determining the levels of remuneration for
executives, and are key figures in the appointment and removal of
senior managers and in succession planning.
Key Issues in Board Membership
1. Size
• The balance needs to be struck between the benefits of having
varied views and opinions, alongside the need for coherence of
decision-making.
2. Inside/ Outside Mix
• The split between the executive and non-executive directors in
the membership of the board should reflect that their views
carry significant weight.
3. Diversity
• Consideration should also be made as to the necessity of
having a good mix of directors with varied gender, ethnicity,
background, experience, etc.
Induction Program of New Directors
The Company The People Build Relationships

Culture and Values

Meet Senior Management Meet Auditors

Products and Services

Visit Company Sites Meet Major Customers

Organizational Structure

Major Risks and Risk

Management Strategy Participate in Board’s Meet Major Suppliers
Strategy Development
Key Performance Indicators

Briefing on Internal Meet Major Shareholders

Regulatory Constraints Procedures
Continuing Professional Development
Program of the Board
Strategic Planning

Audit Practices and Financial

Procedures Management

Training and
Development
Legal and Regulatory HR Management and
Issues Development

Corporate
Risk Management
Governance

Framework by BPP Learning Media. Approved by ACCA

Appraisal Criteria to Evaluate a
Director’s Performance
Independent and
Innovative Thinking

Familiarity with
Continuous professional
Business and Industry
development
Information

Director’s Appraisal
Criteria

Contribution towards Active Participation in all

business development Business

Positive and
enthusiastic committee
work

Framework by BPP Learning Media. Approved by ACCA

The Board Committees
Board Committees are set-up by the board, consisting of selected
directors (both executives and NEDs), to monitor, report and
provide feedback on particular aspect of the company’s affairs for
which the board has reserved the power of decision-making.

Remuneration Nominations
Committee Committee

Risk Committee Audit Committee

Remuneration Committee
Committee Responsible in recommending the remuneration of
Executive Directors and Senior Managers.

Key Points for Remuneration Committee:

1. Remuneration of Directors should be linked to company’s performance, as
much as possible.
2. Level of remuneration should be sufficient to attract, retain and motivate
directors to perform, but it should not be more than what is necessary.
3. There should be distinct and transparent procedure for developing policy
on executive remuneration and for fixing the remuneration package of
individual directors.
4. No director should be involved in deciding his/ her own remuneration.
5. Contracts of Service should be limited to, ideally, one year.
6. The committee should be made up of independent NEDs.
Nominations Committee
Responsible in identifying and recommending individuals for
appointment to the board and management. The committee also
plays active role in succession planning.

Succession Planning is the process for identifying and

developing new executives who can replace incumbent
executives when they leave, retire or die.
Risk Committee
Committee Responsible in assessing risks of the organization,
including business/ strategic risk, and risk of errors, fraud, losses,
breakdown, etc, and ensuring that are appropriate internal controls
are in place to mitigate them.
Key Roles of Risk Committee:
1. Agree the Company’s Risk Management (RM) strategy.
2. Receive and review RM reports from all operational departments.
3. Monitor overall exposure and specific risks.
4. Assess the effectiveness of the RM strategy.
5. Provide guidance to the Board on Risk.
6. Work with Audit Committee in designing and monitoring Internal Controls.
7. Assist in determining the Company’s Risk Appetite.
Audit Committee
Committee that will serve as “check and balance” for the internal audit
function and liaison with external auditors. It usually consist of at least
three NEDs one of whom must be “financial expert.”

Key Roles of Audit Committee:

1. Hire and fire external auditors.
2. Ensure that external auditors are completely independent, and that they are working in
the best interest of the shareholders.
3. Ensure that the company complies with all laws and regulations applying to it, and that
the necessary reports are filed with authorities.
4. Review and discuss with the management and external auditors the effects of changes
in accounting standards, and the implications of the proposed changes.
5. Acts as mediator between the management and auditors when there are differences in
opinion.
Directors’ Remuneration
Purposes:
1. To attract qualified people to the company, however it should
not be more than necessary.
2. It should provide incentive for the director. The amount that
the company will pay will depend upon:
a. What other companies are paying, and
b. How many suitable candidates are available.
Corporation Code’s Requirement
Sec. 30. Compensation of directors. -
In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation,
as such directors, except for reasonable pre diems:
Provided, however, That any such compensation other than per
diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding
capital stock at a regular or special stockholders' meeting.
In no case shall the total yearly compensation of directors, as
such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year.
Components of Directors’ Remuneration
Basic Salary
• This should be in accordance with the terms of the directors’
contract of employment of the Director.
• Determined by the experience of the director and what other
companies might be prepared to pay for the director’s service.
Performance Related Bonuses
• A common example for this is cash bonus for good
(accounting) performance computed based on a fixed
percentage of salary or pay.
• Another type of Remuneration is “Transaction Bonuses”
wherein the CEP get a bonus for acquisitions, regardless of
subsequent performance.
Components of Directors’ Remuneration
Share and Share Options (Share Scheme)
• Provided as a long-term incentive for executives to have
personal interest in the performance of the company’s share
price over a period of time.
Loyalty Bonuses
• Provided to directors to motivate them to stay with the
company over a period of time.
Benefits in Kind
• May include transportation (e.g. car), health and life insurance,
holidays, expenses and loans.
Pension Benefits
• On top of basic salary, several companies provide pension
contributions for directors and staff.
 Approaches to
Corporate Governance &
Models of Business Ownership
Notre Dame of Dadiangas University
Business College – Accountancy Program
Module Prepared by: Prof. Jon Leo J. Licayan, CPA
Approaches to Corporate Governance
RULES-BASED PRINCIPLES-BASED
• Companies must be required • Sets out broad principles
by law to comply with supported by guidance.
established principles of good • Works on a comply or
corporate governance. explain basis, with any
• Non- compliance cannot be departure from the specific
justified, hence companies has provision of the code.
either succeeded or failed in • Allows investors to decide if
complying with the established they agree that the
rules. departure is appropriate.
• Investors will tend to rely on
third parties to penalize the
company for non-compliance.
Rules-based Approach
Benefits:
1. Easier compliance with the rules, as they are unambiguous, and
can be evidenced.
2. Provides a consistent minimum standard of governance for
investor confidence.

Disadvantages:
1. Allows no leeway or deviation, irrespective of how illogical the
situation is.
2. Enforcement can be difficult for situations that are not covered
explicitly by the rules.
Principles- based Approach
Benefits
1. Allows greater flexibility and potential cost savings because companies
can develop their own approach to corporate governance.
2. Applies across different legal jurisdictions, which makes the governance
of a multi-national business more effective.
3. Forces both boards and shareholders to think about the consequences
of governance arrangements.

Disadvantages:
1. It is so broad that they are of very little use as a guide to best corporate
governance practice.
2. Investors cannot be confident of consistency of approach.
3. Incorrectly viewed as voluntary.
Models of Business Ownership
INSIDER SYSTEMS OUTSIDER SYSTEMS
• The company listed in stock • Shareholding of listed
exchange is owned and company is more widely
controlled by a small number dispersed, and there is the
of major shareholders. manager- ownership
separation.
• The shareholders may be
members of the company’s
founding families, banks
other companies or the
government.
Insider Systems
Benefits:
1. Easier to establish ties between owners and mangers.
2. Agency problem is reduced and costs of monitoring is also reduced.
3. Easier to influence company management through ownership and dialogue.
4. A smaller base of shareholders may be more willing to take a long-term
strategic view of their investment.

Disadvantages:
1. There may be discrimination against minority shareholders.
2. Insider systems tend not to develop more formal governance structures until
they are forced to.
3. May be reluctant to employ outsiders in influential positions and recruit
independent non-executive directors.
4. Prone to opaque financial transactions and misuse of funds.
5. Succession issues may be a major problem.
Outsider System
Benefits
1. Separation of ownership and management provides impetus for
the development of more robust legal and governance regimes to
protect shareholders.
2. Shareholders have voting rights that they can use to exercise
control.
3. Hostile takeovers are far more frequent.

Disadvantages:
1. Companies are more likely to have an agency problem and
significant agency costs.
2. Larger shareholders tend to have short-term priorities and prefer
to sell their shares.
Theories in Ethics

Notre Dame of Dadiangas University

Business College – Accountancy Program
Module Prepared by: Prof. Jon Leo J. Licayan, CPA
Absolutism vs. Relativism
Absolutism Relativism
• Unchanging and immutable set • Wide variety of ethical
beliefs and practices
of moral rights or percepts.
• What is “correct” in any
• Hold true in all situations given situation will depend
• Common to all societies on the conditions at the
• This viewpoint also time.
corresponds to dogmatic • Ethics may be affected by
approach. culture and history.
• This viewpoint is similar to
pragmatic approach in
attempting to find a solution
based on the given belief
system of the individuals
involved.
Absolutism
Advantages of Absolutism
• It allows moral rules to be evaluated critically.
• It is fair as people are treated the same as the rules are the
same for everyone.
• If a moral rule is right, then there would be no need to have
different rules for different people because the absolute rules
are universal.
Disadvantages of Absolutism
• Sometimes it is not appropriate to treat people the same due to
circumstances that arise due to situations.
• Life is not simply 'black and white' and as this is the case, it is
simply not right to make everyone live by the same rules.
Relativism
Advantages of Relativism
• It allows for the diversity that is present in the world.
• It understands that life is not black and white.
• Cultures may believe that their practices are more justifiable
than other cultural practices, but by using a relativist approach,
this will allow for acceptance between different peoples.
Disadvantages of Relativism
• Just because there are different moral views, it doesn’t
necessarily mean that they are all of equal value.
• Cultural Relativism also ultimately reduces the meaning of
what is ‘good’ to ‘what is socially acceptable’.
• It may be more difficult to decide when the rules need changing
in different circumstances.
Deontological vs. Teleological
Deontological
• An action can only be deemed right or wrong when the morals for taking
that action are known.
• It is the action itself that makes it ethical or unethical, not the
consequences of an action.
• For an action to be considered morally right it must satisfy the following
tests:
• Consistency
• Is the action being consistently done by all individuals? Will
others do it following the same underlying principle?
• Human Dignity
• Act so that you treat humanity, whether in your own person or in
that of another, always as an end and never as a means only.
• Universality
• Would an action be viewed by others as moral or suitable ?
Deontological vs. Teleological
Teleological
• Also referred as consequentialist theory because the correctness of an
action depends on its outcome.
• Two perspectives of Teleological Approach:
• Egoism
• An act is justified if the decision-makers freely decide to pursue
their own short-term desires or long-term interests.
• The egoist will also do what appears to be 'right' in society
because it makes them feel better.
• The subject for all ethical decisions is the “self”
• Utilitarianism
• The ethics of an action should be judged in terms of the good
that it brings to the most number of people.
• “Greatest good principle”
Kohlberg’s Cognitive Moral Development
(CMD) Theory
CORPORATE SOCIAL
RESPONSIBILITY

Notre Dame of Dadiangas University

Business College – Accountancy Program
Module Prepared by: Prof. Jon Leo J. Licayan, CPA
Corporate Social Responsibility
Is an aspect of the overall discipline of business ethics that
arose because of increased public consciousness about
the role of business in helping to cultivate and maintain
highly ethical practices in society and particularly in the
natural environment.
“Humanity should be treated always as an end, and never as a means only”
- Kantian Moral Theory
Carrol’s Model of Social Responsibility
Gray, Owens and Adams 7 CSR Positions

Image by: Kaplan Financial Knowledge Bank

PROFESSIONAL ETHICS
FOR ACCOUNTANTS

Notre Dame of Dadiangas University

Business College – Accountancy Program
Module Prepared by: Prof. Jon Leo J. Licayan, CPA
100.1 IESBA Code of Ethics for
Professional Accountants, states that …
A distinguishing mark of the accountancy profession
is its acceptance of the responsibility to act in
the public interest. Therefore, a professional
accountant’s responsibility is not exclusively to
satisfy the needs of an individual client or employer.
Public Interest
• Considered the collective well-being of the community of
people and institutions the professional accountant serves,
including clients, lenders, governments, employers,
employees, investors, the business and financial community
and others who rely on the work of professional accountants.

How can accountant act in the public interest?

• A professional accountant shall observe and comply with
this Code. If a professional accountant is prohibited from
complying with certain parts of this Code by law or regulation,
the professional accountant shall comply with all other parts of
this Code.
Impact of Accountancy Profession on
Business and Society
Mechanistic Issues
• The financial information prepared by accountants are
used to judge the performance of a company or its
directors in line with a regulation or contract.

Judgmental Issues
• The figures in the accounts influence the judgment of
their users.
Fundamental Principles
• Integrity
• Objectivity
• Professional Competence and Due Care
• Confidentiality
• Professional Behavior
Integrity
• The principle of integrity imposes an obligation on
all professional accountants to be
straightforward and honest in all professional
and business relationships. Integrity also
implies fair dealing and truthfulness.
Objectivity
• The principle of objectivity imposes an obligation
on all professional accountants not to
compromise their professional or business
judgment because of bias, conflict of interest
or the undue influence of others.
Professional Competence and Due Care
• The principle of professional competence and due care
imposes the following obligations on all professional
accountants:
(a) To maintain professional knowledge and skill at
the level required to ensure that clients or employers
receive competent professional service; and
(b) To act diligently in accordance with applicable
technical and
Confidentiality
• The principle of confidentiality imposes an obligation on
all professional accountants to refrain from:
(a) Disclosing outside the firm or employing
organization confidential information acquired as a
result of professional and business relationships
without proper and specific authority or unless there
is a legal or professional right or duty to disclose; and
(b) Using confidential information acquired as a result
of professional and business relationships to their
personal advantage or the advantage of third
parties.
Professional Behavior
• The principle of professional behavior imposes an obligation on all
professional accountants to comply with relevant laws and
regulations and avoid any action that the professional
accountant knows or should know may discredit the
profession. This includes actions that a reasonable and informed
third party, weighing all the specific facts and circumstances
available to the professional accountant at that time, would be
likely to conclude adversely affects the good reputation of the
profession.
Conceptual Framework Approach
• The circumstances in which professional accountants
operate may create specific threats to compliance
with the fundamental principles. It is impossible to
define every situation that creates threats to compliance
with the fundamental principles and specify the
appropriate action.
• The conceptual framework requires a professional
accountant to identify, evaluate, and address
threats to compliance with the fundamental
principles.
Conceptual Framework Approach
• When a professional accountant identifies threats to
compliance with the fundamental principles and,
based on an evaluation of those threats, determines that
they are not at an acceptable level, the professional
accountant shall determine whether appropriate
safeguards are available and can be applied to
eliminate the threats or reduce them to an acceptable
level.
Conceptual Framework Approach
• In making that determination, the professional accountant shall
exercise professional judgment and take into account
whether a reasonable and informed third party, weighing all
the specific facts and circumstances available to the
professional accountant at the time, would be likely to
conclude that the threats would be eliminated or reduced
to an acceptable level by the application of the safeguards,
such that compliance with the fundamental principles is not
compromised.
Conceptual Framework Approach
• When applying the conceptual framework, a professional
accountant may encounter situations in which threats
cannot be eliminated or reduced to an acceptable level,
either because the threat is too significant or because
appropriate safeguards are not available or cannot be applied.
In such situations, the professional accountant shall decline
or discontinue the specific professional service involved
or, when necessary, resign from the engagement (in the
case of a professional accountant in public practice) or the
employing organization (in the case of a professional
accountant in business).
Conceptual Framework Approach
• A professional accountant may inadvertently violate a
provision of this Code. Depending on the nature and
significance of the matter, such an inadvertent violation may be
deemed not to compromise compliance with the fundamental
principles provided, once the violation is discovered, the
violation is corrected promptly and any necessary
safeguards are applied.
Conceptual Framework Approach
• A professional accountant may inadvertently violate a
provision of this Code. Depending on the nature and
significance of the matter, such an inadvertent violation may be
deemed not to compromise compliance with the fundamental
principles provided, once the violation is discovered, the
violation is corrected promptly and any necessary
safeguards are applied.
Common Threats to Accountant’s
Compliance to Fundamental Principles
Self-interest threat – the threat that a financial or other interest
will inappropriately influence the professional accountant’s
judgment or behavior;

Self-review threat – the threat that a professional accountant will

not appropriately evaluate the results of a previous judgment
made or service performed by the professional accountant, or by
another individual within the professional accountant’s firm or
employing organization, on which the accountant will rely when
forming a judgment as part of providing a current service;
Common Threats to Accountant’s
Compliance to Fundamental Principles
Advocacy threat – the threat that a professional accountant will
promote a client’s or employer’s position to the point that the
professional accountant’s objectivity is compromised;

Familiarity threat ─ the threat that due to a long or close

relationship with a client or employer, a professional accountant
will be too sympathetic to their interests or too accepting of their work;

Intimidation threat – the threat that a professional accountant will

be deterred from acting objectively because of actual or
perceived pressures, including attempts to exercise undue influence
over the professional accountant.
Safeguards to Mitigate Threats
Safeguards are actions or other measures that may eliminate
threats or reduce them to an acceptable level. They fall into two
broad categories:
(a) Safeguards created by the profession, legislation or
regulation; and
(b) Safeguards in the work environment.
Safeguards created by the
Profession, Legislation or Regulation
• Educational, training and experience requirements for
entry into the profession.
• Continuing professional development requirements.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring and disciplinary
procedures.
• External review by a legally empowered third party of the
reports, returns, communications or information
produced by a professional accountant.