CHAPTER 2 Accounting in society 752.6 Explain the use of codes of ethical conduct and apply ethical decision-making methods to
business situations.
Codes of ethical conduct prescribe minimum ethical standards and are widely used in business to
communicate a respect for the public good. The fundamental principles are integrity, objectivity,
professional competence and due care, confidentiality and professional behaviour. The methods pro-
posed by Langenderfer and Rockness and the St James Ethics Centre were presented. The appli-
cation of ethical decision-making methods helps to identify the issues and clarify thought when
making a business decision.
Key terms
Agency theory Theory which describes the relationship where one party (the principal) employs
another (the agent) to perform some activity on their behalf.
Business sustainability Development that meets the needs of the present without compromising the
ability of future generations to meet their own needs.
Corporate governance Direction, control and management of an entity.
Corporate social responsibility (CSR) An entity’s obligations to society in general and to the environment.
Deontological theories Theories concerned with duty.
Ethical egoism Ethical egoism is the moral position where a person ought to do what is in their own
self-interest.
GRI reporting framework A sustainability framework that provides guidance on how organisations
can disclose their sustainability performance.
Kantianism Theory proposed by Kant that an action is morally right if it is motivated by a good will
that stems from a sense of duty.
Legitimacy theory Theory that entities must conduct operations in accordance with societal
expectations.
Shareholder value The view that holds that the purpose of the corporation is to maximise shareholder wealth.
Stakeholder An individual or group with an interest in an entity.
Stakeholder theory Theory that espouses the purpose of the entity is for the good of all stakeholder
groups (not just for the purpose of maximising shareholder wealth).
Stewardship theory Theory that espouses that managers, left on their own, will indeed act as
responsible stewards of the assets they control.
Teleological theories Theories concerned with the consequences of decisions.
Triple bottom line Considers the economic, social and environmental performance of an entity.
Utilitarianism All individuals maximising their utility will lead to society’s utility being maximised also.
APPLY YOUR KNOWLEDGE 16 marks
Financial acumen may not be every director’s strength but ignorance is no excuse when it comes to
understanding company accounts. The former directors of property group Centro found this out the hard
way when the Federal Court brought down its landmark decision against them regarding their lack of
due diligence in the lead-up to the company’s near collapse in 2007.
The eight former directors and executives were found to have breached the Corporations Act by
signing off on financial reports that failed to disclose billions of dollars of short-term debt. The case was
watched closely by boards of directors across Australia, although the recently announced penalties were
considered lenient. Declarations of contravention were made against all defendants.
Regardless of the lightness of the penalties, the case will continue to hold important lessons for
Australian company directors. In his ruling, Federal Court judge John Middleton commented that the
omission of more than A$2 billion of debt from the accounts could have been identified ‘without diffi-
culty’. What was required of the directors was ‘critical and detailed attention’, rather than relying on