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2
Stakeholders, Governance, and Corporate Culture
Stakeholder theory is managerial… [S]takeholder theory asks, what responsibility does management have to
stakeholders?… Many proponents of a shareholder, single-objective view of the firm distinguish the economic
from the ethical consequences and values.
(Freeman, 2004, p. 364)
Stakeholders
In the conduct of business, with investment and consumer interests, the concept of a stakeholder may
include shareholders, creditors, employees, financiers, customers, regulators, financial analysts, and
local, national, or international communities. Stakeholders may comprise anyone who has a direct or
indirect interest in a business and its activities. Traditionally shareholders are considered primary
stakeholders as they have a direct interest in the business. The notion of a primary stakeholder,
1
however, suggests that other stakeholders are secondary and that implies they are of less importance.
The demarcation denotes a preferential sequence where the interests of one group take priority over
the other.
In this book, with its emphasis on fraud business, stakeholders are viewed as a collective, one
group. Adverse economic and social consequences of financial statement fraud (FSF) are widely
dispersed as evidenced by international case examples. Albeit that the degree of suffering
2
experienced by individuals or stakeholder groups will differ, both entities arguably are of equal import
and ought not to be differentiated. For management, delineating stakeholders as either primary or
secondary may be somewhat tricky as they try to balance the wants of both.
Advocates of the “separatist” stakeholder concept suggest: ‘One of the challenges of managing an
organization is to balance the needs of both primary and secondary stakeholders.’ Yet this is
3
problematic. To identify both primary and secondary stakeholders and to establish their actual needs is
impracticable. Arguably it is not possible to identify all stakeholders in any particular business, at any
particular time.
On the other hand, the concept of direct and indirect stakeholders in business is reasonable.
Evidently some stakeholders hold a direct stake in the business (e.g. owners, employees, creditors)
whilst others still with interest are more external to the business and its operations (e.g. regulators,
potential investors, financial analysts). It is the tenor of primary and secondary stakeholders that is of
concern. If the wants of one stakeholder group are given precedence over another, the result is likely
to end in dispute. Such conflict, in turn, increases pressure on directors and managers to achieve
business outcomes that satisfy a seemingly disconnected bunch. Therein corporate officers may be
more inclined to take opportunities to appease the more vocal or powerful group. Mounting pressure to
achieve a particular periodic financial outcome where opportunities to diminish that pressure prevail
can result in fraudulent behaviour.
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Hence, it seems advantageous for directors and managers to work in concert to achieve the
organization’s goals with focus on one stakeholder group. The purpose of the business may be
multifaceted. Its objectives and goals should be focused to maximize financial returns for shareholders
and sustain business continuity, but not to the detriment of others (communities or the environment).
In this context, the conduct of business would take account of economic, social, and ethical issues. The
business and its activities then would more likely be sustainable in both financial and non-financial
concerns.
The contrasting views on stakeholder theory and the shareholder versus stakeholder approach to
business and its purpose are of concern. Confusing to some is that maximizing shareholder wealth is
arguably an ethical consideration. In many situations it embodies good management. On the other
4
hand it likely encourages a short-term focus on maintaining or increasing profits—regardless of whom
or what may be disadvantaged. This in turn can intensify the pressure on managers to be able to report
financial results and non-financial outcomes that some expect, but that may not be reasonable
(acceptable or ethical) in a particular environment.
When pressure and opportunity to mitigate the pressure converge, the circumstances for fraud are
set. It does not mean that fraud will occur but it signals a warning. The potential fraudster needs to
rationalize the act. Under varying situations of intense pressure, given the opportunity, many otherwise
honest people will rationalize a fraudulent act. Debatably there is no generally agreed profile of a
fraudster. It may be anyone who under a different set of circumstances would not consider or
participate in fraud. See .
5 Diagram 2.1
Kranacher et al. (2011, p. 12) explained ‘whether fraud perpetrators are male or female, they look
like average people… fraudsters typically do not have a criminal background… [and] it is not
uncommon for a fraud perpetrator to be a well-respected member of the community’. On the other
hand some advocate there are certain characteristics that may be attributed to the most likely fraudster.
On that point the debate continues.
6
Diagram 2.1 The Fraud Triangle Factors and Elements
Source: The diagram has been devised and constructed by the authors.
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Stakeholder Outcomes: Short-Term vs. Longer View
To effectively sustain business practice obliges managers and directors to attend to both financial and
non-financial outcomes of business activities. Such attention should not be short term. If a short-term
view is taken and rising pressure from shareholders and other stakeholders to perform well and report
on short-term achievements is evident; the risk of management fraud escalates.
Issues of corporate social responsibility (CSR) are increasingly of concern to business and to
sustainable business practices. Assuredly most managers want to maximize shareholder wealth and
sustain business activities, and debatably the two need not be in conflict. Unfortunately, sometimes
they are. Moser and Martin (2012, p. 797) explained that ‘accounting researchers (e.g., Friedman,
1970; Shank et al., 2005; Dhaliwal et al., 2011), as well as some writers in the financial press
(Karnani, 2010), have typically taken the perspective that companies will, , only engage in
or should
socially responsible activities when doing so maximizes shareholder value’ [emphasis added]. Others
disagree and remind us that actively pursuing socially responsible operations is more likely to increase
business profitability, hence the wealth of all. Importantly, the costs associated with socially
7
responsible business operations and reporting need not be at the expense of shareholder returns (Moser
and Martin, 2012).
Kim et al. (2012) suggested that socially responsible activities engaged by business that diminished
shareholder returns were unethical as earnings management is deemed unethical. Others, with focus on
the shareholder approach, advocate maximizing shareholder returns is socially responsible. Some
8
consider it manifestly so. Yet a singular and short-term attention to rates of return on investments
9
augments corporate pressure and as such increases the likelihood of management fraud. Investors, like
financial analysts, might expect to take some responsibility for being aware of circumstances that are
apt to result in fraudulent behaviour. The seemingly endless pursuit of “who is to blame?” in an
corporate collapse, or fraud, warrants continued attention. It may be that it is
unexpected unexpected
not necessarily is to blame for the circumstance but provides the opportunity for the
who 10 what 11
circumstances that prevail.
Directors and managers need to know the financial state of their business and its capacity to
continue to trade. That is in many jurisdictions a financial and a non-financial necessity to enable
business continuity and to avoid insolvent trading. Albeit that is, that most non-financial
12
circumstances in business eventually trade into a financial result. Perceptibly then shareholders,
employees, customers, creditors, financiers, and many others are interested in the business continuing
its operations. Additionally they are interested in the outcome of those operations (financial and
non-financial), as those business activities will potentially benefit or adversely affect many. In that
vein stakeholders generally are liable to want a considered and well-reasoned approach to the
management of business. Hence a longer-term approach to profitable outcomes of maximizing
financial returns with business continuity and sustainable operations is probable.
Stakeholders and the Concept of Maximizing Returns
Recall that shareholders as primary stakeholders signal a single-minded approach to the conduct of
business. That focus enables the underlying theory of corporations to emphasize maximizing financial
returns for the owners. So the idea facilitates action to glean a “best” rate of return on the amount of
money shareholders invest in the business. Globally, case examples illustrate this is not always in
13
the best interests of other stakeholders, for instance employees. Interestingly, some suggest
14
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employees along with customers are also primary stakeholders. In addition, local communities are
15
of prime importance for business especially when determining business interests and possible
outcomes of their actions. 16
When businesses engage in activities that maximize economic returns for shareholders the results
may, but not always, connect with socially responsible outcomes for others. In this context the
17
concept of primary stake-holders versus secondary stakeholders again is tricky. Archival excerpts on
the Ok Tedi mine in PNG, for instance, reveal that BHP’s connection to operating the massive gold
18
and copper mine was problematic to the extent that the conglomerate moved to extricate itself from
operations largely due to the scale of the resulting ecological spoil. The apparent increased pressure
19
to extricate economic satisfaction for shareholders and others adversely affected governance and
socially responsible choices.
Environmental and social damage in the case of Ok Tedi was huge. Partly it resulted from economic
influences that were, at that time, subject to public and private decisions. Those decisions seemingly
were in conflict with the safety and well-being of the people. In this case public officials and
20
corporate officers could be seen to be primary stakeholders in that particular “reform” process. The
episode illustrates how the notion of primary and secondary stakeholders, in all processes, can become
tricky. That a business exists solely to maximize financial returns for its shareholders is a narrow
concept. Freeman et al. (2004, p. 364) explained:
Many proponents of a shareholder, distinguish the economic from the ethical
single-objective view of the firm
consequences and values. The resulting theory is a narrow view that cannot possibly do justice to the panoply
[full array] of human activity that is value creation and trade, i.e., business. (emphasis added)
Some advocates of the shareholder approach separate actions necessary to achieve economic goals
from the principles of conducting business in an ethical manner (fair, decent, and just). The broader
stakeholder approach and that includes shareholders, with its communal focus does not separate the
two. Theoretically then under the broader approach it is more likely that financial, social and
environmental awareness will converge for the betterment of communities and thus enable a dynamic
and more just business community. In that environment, pressure that may be attributed to a probable
increase in FSF may actually dissipate. In turn it is more likely that business continuity will sustain.
As on-going business activities require both an economic certainty (sound financial position) and a
culture that does not violate the rights of any (social responsibility), the fundamental theory of a firm
in the conduct of its business could well be revisited.
Business Outcomes: Economic and Ethical
Previous studies have determined that business managers comprehend the necessity to consider and
embrace a broad approach to the purpose of business. In so doing their business activities have
21
achieved improved outcomes both in terms of profitability and business relationships. In this context, a
crucial driver of business continuity is to focus on both the economic and ethical (moral) suppositions
of conducting business.
On the other hand, a business organization might secure continuity of its operations, attend to its
economic needs, and do so to the detriment of others. Evidently this is unethical. Recall that after the
invasion of Kuwait (1990), the UN placed heavy sanctions on Iraq. In its disadvantaged state Iraq was
unable to provide enough food for its people. In response, by 1995 the UN Oil-for-Food programme
was established. Subsequently by 1996 Iraq was able to sell its oil to purchase food and other
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humanitarian goods for its people—all under UN contracts, supervision, and agreements. One of its
purchases was for wheat and the major supplier was the Australian Wheat Board (AWB). 22
The case of the AWB and its involvement in the UN’s oil-for-food programme is an exemplar of
economic versus ethical dilemma. The AWB chose the economic route, and by 1999 around 10 per
cent of the Australian wheat exports per annum went to Iraq. It wasn’t the sale of wheat per se that
was the problem, but the varying shades of the process that caused grave concern. Ultimately the
AWB—at that time—was found lacking in moral and corporate responsibilities in the conduct of its
business. The organization’s unethical behaviour ended in a Royal Commission that scathingly
rebuked the AWB, its executives, and others. Since that time the AWB has implemented many
changes to reconstruct its organization and to promote itself as an ethical and socially responsible
business; different from the one that operated during the Oil-for-Food programme, 1999–2004. 23
The following example reminds of the unethical and fraudulent under-tones that pervaded
circumstances of and for many business constructs during the time of the UN humanitarian
programme.
The AWB and the Royal Commission Inquiry into the Oil-for-Food Programme
The question of corporate ethics and culture was extensively examined during the Royal Commission
into ‘certain Australian companies in relation to the UN Oil-for-Food Programme.’ The Honourable
24
Terrence Cole (2006) AO RFD QC questioned the activities of Australian companies, specifically with
regard to allegations of bribery of foreign officials connected to the Iraqi government. 25
The Royal Commission examined in detail the activities of the AWB and its payment schemes. One
of which was a ‘discharge and land transport fee of US$12.00 per metric tonne to an Iraqi entity, the
Land Transport Co.’ In fact this fee was, and arguably the AWB then knew it was, a means of
26
making US dollar payments to the Iraq government in contravention of UN Sanctions. The Royal
Commission found that the somewhat inappropriate ‘conduct of the AWB and its officers was due to a
failure in [the organization’s] corporate culture.’ It was found that the AWB operated, at that time, in
an ethos of self focus in order to achieve its economic goals. That is, it spent time and money with
intent to find ways in which to arrange its business activities in Iraq to avoid breaching the law; rather
than working diligently in conjunction with the UN’s oil-for-food programme. The latter is
27
important because the programme was intended to help sustain the innocent people of the land by
providing them with much needed food, medical supplies, and other essentials.
Globally, the AWB was not the only organization so involved. With regard to the AWB however
the cost was high. The Royal Commission reported, that among other things the ‘AWB lost its
reputation,’ ‘shareholders lost half the value of their investment,’ ‘trade with Iraq worth more than
A$500 million per annum was forfeited,’ and ‘many senior executives resigned’. Further there were
threats of litigation both nationally and internationally as well as ‘potential further restrictions on
AWB’s trade overseas’. 28
Of course that was then and for the AWB the tide may well have turned and the organization reborn
as a productive entity. One of the primary warnings from such activities however, that continue to
29
evolve is the affect of related outcomes on all stakeholders. Thus we return to earlier consideration of
different stakeholder groups.
In essence it may be said that elevating the rights of one stakeholder group is ostensibly detrimental
to other stakeholder groups. Freeman et al. (2004, p. 365) suggested: ‘Shareholder rights are far from
absolute, regardless of how much economists talk about the corporation as being the private property
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33
of the shareholders. The rights of shareholders are prima facie at best, and cannot be used to justify
limiting the freedom [choices] of others without their consent.’ Seemingly it is evident, given case
circumstances of business operations and outcomes of same that stakeholders will either benefit or
suffer from the economic and social outcomes attributed to those activities.
In this context a stakeholder approach to business is twofold. It pays attention to both the purpose of
the organization in achieving its business goals (economic) and the necessity to attend to the
relationships that foster good business (social awareness and ethics). The stakeholder approach
considers principles broadly, in that ethics and economics are not separated in the conduct of business.
We acknowledge many may argue the shareholder approach to conducting business does not discount
ethics in business deliberations. We suggest, however, this argument is tenuous without including in
its purpose, awareness of, and actions that support, social responsibility. The latter is of particular
importance herein as we deliberate circumstances of fraud in published statements of financial
account.
Although maximizing shareholder returns is a legitimate aim in progressing business economically,
it is also in some circumstances likely to be a constricted view in sustaining business environmentally.
The broader stakeholder approach advances the shareholder approach to achieve improved results
generally. In this way it enables sustainable business activities that result in more positive outcomes
for business organizations; and that betters the situation for all. Moreover this approach is likely to
help management on a practical level, as ‘[s]takeholder theory… reflects [on] and directs how
managers operate rather than primarily addressing management theorists and economists [focus on
“financial” rates of return]’ (Freeman et al., 2004, p. 364).
Diagram 2.2 Stakeholder Theory (Shareholder vs. Stakeholder Approach: Primary and Secondary Stakeholders)
Source: The diagram has been devised and constructed by the authors.
Understandably, different business organizations nurture different business goals. In that context the
purpose of specific businesses and the outcomes of their activities need to be articulated clearly to
stakeholders. This is of particular import in matters of governance.
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Governance
Recently the focus on , internationally, has become entrenched with regard to
corporate governance
securities markets and that concept tends to emphasize the importance of following a set of rules or
principles. Corporate entities might be seen to satisfy governance mandates by instigating a ‘tick the
box’ approach to compliance and accountability. Being seen to conform to expectations of regulators
and securities markets arguably does little to address actual governance concerns. In other words a
business organization may be seen to be doing what is required by the authorities, rather than
identifying and instigating action for the betterment of the organization, its business initiatives and
outcomes, and for its stakeholders. That is the form of corporate governance. Emphasis on governance
is different to giving weight to and necessitates action to focus on substance
corporate governance
over form. 30
Some may argue that corporate entities do continually enhance and change their governance
practices to achieve the best outcomes possible and do so in ever-changing and challenging economic
environments. In particular, regulators and other authoritative organizations support proactive
corporate behaviour. In the USA, for instance, “Business Roundtable” as an authority on corporate
governance is of this view. It also strongly suggests that ‘best practices by public companies [are
31
achieved] within a framework of laws and regulations that establish minimum requirements while
affording companies the ability to develop individualized practices that are appropriate for them’
(Business Roundtable, 2012, p. 1). This is debatably a widely held and important view, certainly as
32
business organizations are commonly accepted to be different one from the other, and so require the
flexibility to act in the organizations’ and its stakeholders’ interests.
In recent years the USA corporate entities have increasingly been encouraged to:
Adopt best practices within the framework of strengthened securities market listing standards and legal
requirements that developed beginning with the passage of the Sarbanes-Oxley Act of 2002 and have
continued with the financial crisis and the passage of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. 33
Such action and expectations to so act have been initiated by many countries globally. This has
34
particularly occurred since the earlier years of this millennium and following the Global Financial
Crisis (GFC). 35
Although businesses, companies, multi-national corporations may be seen to initiate good
governance practices, the concept of “good governance” in itself is problematic. Clarke and Dean
(2007, p. 33) with regard to two relatively recent unexpected corporate collapses in the USA and
Australia explained:
Responses to the Enron and HIH collapses provide a sorry tale. Overdosing on governance rules, and the
public’s seduction by flimsy evidence in support of them, characterised those responses. Common sense has
been outplayed by the false appeal of swift regulatory action. Appearances of good governance have
. (emphasis added)
outvalued the reality of achieving it 36
Economic circumstances are at times difficult and whilst we engage in a money economy this will in
all likelihood continue. Importantly, what is considered arduous in the context of trade by one business
may not be so for another. The individual business challenges for each organization will define, to
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35
some extent, the willingness of its managers (and stakeholders) to participate in what they deem to be
good governance practices. Moreover, what authorities may deem to be “best practices” may not apply
across all organizations. Hence, individual business entities given flexibility will likely seek to
practice good governance in the spirit in which it was intended; because those actions will be good for
business outcomes and business continuity.
Governance Broadly
Governance in its broader context suggests directors, executives, and managers centre their attention
on leading and managing the organization and its resources, with focus on its people and
organizational goals. They do this to achieve the best results for the business and its outcomes with
due attention to what securities markets may require. In this mode it is probable that stake-holders will
be privy to voluntary publications of governance matters. Such publications are apt to supplement
reported details that comply with the wants of securities markets. So good governance will incorporate
both, that which may be considered a mandate and further details given voluntarily to better inform
stakeholders. Notably the concept of governance per se is not a recent development. Yet many seem
37
to think, or act as though, it is.
Steinberg (2011, p. 2) explained that governance to him means ‘the allocation of power among the
’, although ‘the term is used also to encompass an array of
board, management and shareholders
actions taken by management in running a company, from senior levels down throughout the
management ranks’, (emphasis in the original). The notion of including shareholders in the sphere of
governance of a business and its activities is interesting. It empowers shareholders as activists in the
decision-making realm of the organization. But how this could work in a serviceable manner for all
stakeholders is problematic. The concept is awkward.
Depending on the extent of shareholder activist involvement, it could be disruptive and
counter-productive. Shareholders as the owners are directly involved in the business. On the other
hand, they are external to the organization and its business operations. They are not inherently part of
its daily operating procedures. Thus, the concept of shareholder activists, individual or groups,
involved in daily business decisions seems odd. Furthermore there are likely to be disadvantages
surfacing within the shareholder group itself. For instance, in determining the extent to which minority
shareholders and or preference shareholders may form an activist group, or be discounted. At worst:
If the shareholder power pendulum swings too far, we may be faced with frequent turnover of directors, large
numbers of dissident directors, and boards unable to come to consensus. A result may be an adversarial
board-CEO relationship, distracted senior management, and disrupted corporate performance. Directors
spending time campaigning or otherwise politicking and CEOs dealing with dysfunctional boards serve no
purpose, and will be both distracting and destructive.
(Steinberg, 2011, p. 285)
With such a scenario the pressure and possibly the opportunity to invoke fraudulent behaviour
increases. Shareholders by and large do have decision-making power, for example, by way of
discussion, argument, input at annual general meetings, special meetings, investment choices, and the
like. There is also the power of the media that shareholders and other stake-holders can call upon.
Albeit that the responsibility and accountability for decision outcomes on business operations rests
ultimately with management and directors, stakeholders in business can create waves and sometimes
be disruptive. This is hardly in the best interests of business continuity.
38
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A continuing and financially secure corporate business operation requires a well selected group of
skilled, experienced, educated, knowledgeable directors with the fortitude to work in harmony. An
39
effective board of directors will have the tenacity to ask hard questions when necessary and demand
answers that satisfy. This is increasingly a requisite for an effective board. It is of concern on a
40
global front as the stipulations for directors’ increase and the punitive outcomes for misleading
disclosures made by, or allowed to be published by, directors and/or the board escalate. 41
Hence the culture that emanates from the top of the organization throughout the entire body of the
business is of concern. Commonly this culture is referred to as the ‘tone at the top.’ We advocate that
many, incorrectly, view the responsibility for this tenor in the business, to be solely the responsibility
of the directors, the CEO, and other executive officers. In reality the tone of the culture that permeates
throughout an organization is dependent on the attitude and actions of all the organizations’
employees. We agree, however, that the beginning of the culture (the organizational cult) rests with
the executives. If employees throughout the organization witness that slack behaviour, loose business
morals, and unethical transactions are rife in their business—employees at all levels are likely to
follow suit.
Corporate Culture
The ‘tone at the top’ is a concept that centres on an organization’s culture. It goes beyond attention to
the traditional theory of a business firm—to maximise profits and maximise shareholder returns. In
42
this context culture invokes attention to broader aspects inherent to an organization and its activities. It
includes social awareness and ethical behaviour in the conduct of business. It alerts stakeholders to the
organization’s business systems, its internal control environment, the dynamics of its leadership, and
the business’ willingness to be proactive as well as adapt to changing business circumstances. In this
mode, business and its leaders are challenged to inform and educate stakeholders and embed controls
that diminish the opportunity for fraud to occur within business’ internal control environment.
Attention to sustainable business practices is ever-increasing. In line with this is awareness of
43
business’ corporate social responsibility. More over persistent critical thought and debate on what
44
constitutes basically the theory of business continues. Importantly in the case of long-running,
profitable, and otherwise ‘successful’ businesses it is evident that the underlying theory of business
(its mission, its vision for the future) is not static. 45
Drucker (1994) provided many examples of such business achievements; for instance, in the case of
the University of Berlin (1809), radical theories defined the organization. That is, until the reign of
Hitler, the Deutsche Bank (1870) and Georg Siemens’ (its first CEO) view of the theory of business
focussed on entrepreneurial involvement and finance. Mitsubishi (1870s) developed radical thought on
business theory that within 20 years cemented its place in multi-national business, and as a leader in
Japan. Later in the USA General Motors (GM) and IBM demonstrated such dynamics throughout the
twentieth century and arguably highlighted that malaise in business theory underpins expected and
unexpected business collapse.
In the case of General Motors and other car manufacturers in Australia from around 2010 this
appears to be evident. As this book is written, a major concern for many is that by 2016 General
Motors (GM) will not be manufacturing cars in Australia. Ford Australia is already on the way out and
Toyota is suspected to follow. It may be argued that this apparent collapse of car manufacturing in
Australia is somewhat due to inattention to changing markets and international challenges. That the
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37
changing focus internationally in what denotes sustainable business practice in car manufacturing and
associated industries has been unattended in Australia—and for some time.
Reiterating the theory of a business firm is not embedded necessarily in economic concepts or
historic operational achievements. Business is dynamic. A vibrant business organization is constantly
aware of its environment (economic and social) and will initiate change in its business activities in
tune with its surroundings. Such change may be proactive, reactive, or both. The alternative—a static
view—is not viable, and it is arguably more likely to result in business failure. The process of
46
conducting business globally is vigorous, and demands continual development. So too are the theories
that underpin the activities of business enterprise. Those theories are also linked to what may
constitute ethics in business practice. Seemingly ethical behaviour in business is likely to lessen
fraudulent behaviour.
Ethics and Ethical Behaviour
The notion of ethics and ethical behaviour in ordinary daily life is arguably the same as that applied in
the conduct of business. On this topic individuals may differ in their opinion. Some may choose to
behave in a completely different way in a business trading circumstance to that of their daily life. 47
Debatably there is or should be no difference between the concept of business ethics and personal
ethics. Given the apparently increasing amount of fraud and fraudulent behaviour in business the idea
warrants discussion and continued debate. Numerous case examples show that a lack of ethical
behaviour in business can, and often does, lead to fraud.
In the case of professional ethics as opposed to business ethics, individuals may disagree
(personally) with a course of action but still be required within their professional discipline to abide by
a certain code or legal requirement. This can lead to conflict and trauma for some. Two online
examples from New Zealand elaborate: 48
A police officer [for instance] may personally believe that a law that they are required to
enforce is wrong. However, under the Code of Conduct for the New Zealand Police, they are
required to obey all lawful and reasonable instructions unless there is good and sufficient
cause to do otherwise.
A doctor may not personally believe that the course of medical treatment chosen by a patient
is the right choice. However, under the Code of Ethics for the New Zealand Medical
Profession, they must respect the rights, autonomy and freedom of choice of the patient.
Circumstances of this type are similar in many countries. The culture that emanates from a
professional body is expressed to some extent by the behaviour of its individual members. That
behaviour may be attributed to the professions’ code of conduct. Of which the substance of the code
would take precedence over its form. Notably there are different attributes between a business
undertaking and that of a profession. Tawney (1920, p. 94) for instance explained: ‘The essence of…
[industry] is that its only criterion is the financial return which it offers to its shareholders. The essence
of the… [profession] is that, though men [and women] enter it for the sake of their livelihood, the
measure of their success is the service which they perform, not the gains which they amass.’ The
primary difference is altruism as it is attributed to professional rite.
Even so the substance of a set of instructions (code) may be misinterpreted by individuals in the
profession because of the form in which they are written. Accounting standards that underpin
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38
generally accepted financial accounting practice are an example. The content of many such standards
are arguably convoluted and confusing. Some advocate that accounting standards are problematic in
assisting business stakeholders in economic decisions. Clarke and Dean (2007, p. 211) asserted,
‘financial disclosure in accord with conventional accounting [practice] generally fails to disclose the
wealth and progress of companies, and the recently promoted IFRSs [International Financial
Reporting Standards] will do little to remedy that.’
Foremost and relevant to note is that the apparent current fixation on ethics and ethical behaviour is
not new.
Debated for at least 2500 years, and commonly understood to be the product of personal choice, ethics can be
equated to the depths of the ocean. While there are some things that we know (e.g., the ocean floor contains
water and ethics are the ground rules by which we live our lives), other elements are mysteries (what
organisms live on the ocean floor and what does it mean to be ethical). Generally, people are continuously
exploring the depths of both. Because ethics are defined individually, there are presumably six billion [or
more] viewpoints about ethics on this planet. 49
Central to considerations of fraud and fraudulent behaviour in an organization are the norms
established by the entity with regard to its people and expectations of their behaviour. This translates
into a required standard of organizational behaviour that may be written into a code of conduct or
similarly, a code of ethics. As such, the organization’s outlook considers the effect of its actions (type
of business operations and outcomes of same) on the broader community as well as its stakeholders.
This may sound ideological to some, but people can desensitize themselves to harmful behaviour and
its outcomes. So, if that thought is applied to business ethics, then an organization without ethical
standards may find its employees submit to opportunities that result in outcomes that would otherwise
be considered harmful and unethical. 50
With regard to FSF there is a direct link between the tenor of the organization and opportunities
within the organization for fraud to occur. As business circumstances, people, and the natural world
are ever-changing, a constant review of a business organization’s internal control environment and its
linkage to mitigate opportunities for fraud is warranted.
Business Dynamic and Fraud
FSF has regard to the quality of the content of statements made (verbal or written) about the financial
state of the organization. As such those involved in constructing or delivering those statements are
accountable for the content of the statements. So once again we are confronted with determining what
denotes quality in a statement about an organization’s financials. Although much has been written and
debated on this point across time, it remains of concern. Herein we take the view that quality of
published financials with regard to business transactions and the outcomes of same are depicted by the
serviceability of the financial numbers reported, hence the information content therein. Notably this is
a difficult area and one of contention for many.
Consider for instance: How is it that we may best determine the substance of the information? On
the one hand, for financial details to be serviceable they need to be of use. In a financial context that
means surely that the content needs to be both suitable and relevant to the task at hand. Thus the
content of published financial statements would directly relate to the subject of the report—that is,
depicted by the title of the financial report.
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39
Chapter three explores this notion of quality with regard to the content of a suite of conventional
financial statements. It elaborates management’s role in providing financial information to
stakeholders within and external to the organization. The link to fraud and fraudulent behaviour is
made with specific regard to bribery and corruption because this is an area of growing concern
internationally. Drawing on case examples, the role of directors and other corporate officers are
examined with due regard for corporate legislation. Underpinning this story is attention to the
necessity for effective communication throughout an organization as well as with external parties.
Thus the duties and accountability of directors and other corporate officers are shown to be entwined
with the details of published financial and non-financial disclosures.
Notes
1 Consider this: ‘While shareholders are stakeholders in the organization, not all stakeholders are shareholders.
Additionally, shareholders are primary stake-holders, but they are not the only primary stakeholders in the
organization. Other primary stakeholders include, but are not limited to, customers and employees.’ Available
at , accessed November 2013.
www.ehow.com/info_7998291_primary-stakeholder.html#ixzz2l2wWxW7u
2 Consider, for example, the stories behind the fraud and failures of Satyam (India); Enron, Adelphia, Tyco
(USA); HIH (Australia); Parmalat (Italy); and many others.
3 See , accessed November 2013.
www.ehow.com/info_7998291_primary-stakeholder.html#ixzz2l2wWxW7u
4 Refer to, for instance, ‘Maximising shareholder value: An ethical responsibility?’ Available at http:/
, accessed November
/knowledge.insead.edu.csr/ethics/maximising-shareholder-value-an-ethical-responsibility
2013.
5 Nonetheless there are certain characteristics that may be attributed to the most likely fraudster. See, for
instance, Greenlee et al. (2007); Kranacher et al. (2011, p. 12); and Albrecht et al. (2012, p. 33).
6 See, for instance, Greenlee et al. (2007); Kranacher et al. (2011, p. 12); and Albrecht et al. (2012, p. 33).
7 See, for instance, , accessed November
http://news.vanderbilt.edu/2013/09/surprising-link-disclosure-profits/
2013.
8 See, for instance, ‘Social responsibility has a dollar value’ at www.theage.com.au/news/business/social
, accessed November 2013. The article
-responsibility-has-a-dollar-value/2006/07/26/1153816252246.html
asserts a valid point on linkage between CSR and shareholder returns.
9 Ibid.
10 ‘There is a widespread phobia that commercial order is threatened by the incapacity of directors and auditors
to form honest judgments, independent of undue influences’ (Clarke and Dean, 2007, p. 211).
11 In non-fraud cases, for instance, ‘[d]isclosure relating to corporate groups’ financial status and performance is
[arguably] at best equivocal, generally misleading and, sometimes, completely meaningless. Protection
offered by the corporate veil to shareholders in respect of claims on their capital, and to creditors by
quarantining a company’s assets to satisfy their claims, has frequently been misappropriated to their collective
detriment but to the betterment of others’ (Clarke and Dean, 2007, p. 128).
12 In Australia under the ACA, s95A defines solvency/insolvency and s588G stipulates the directors’ duty to
prevent insolvent trading. Under s295(4)(c) a directors’ declaration is required on whether the business entity
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40
is able to pay its debts when due and payable. Similar requirements are evident in the legislation of other
countries for instance the UK, Canada, USA and New Zealand. Refer, for example, to Margret (2012, pp.
41–68).
13 See Sundaram and Inkpen (2004); also Freeman et al. (2004) for a response in ‘Stakeholder Theory and “The
Corporate Objective Revisited”’.
14 Pressure on management to portray a failing business as profitable with a sound financial position might result
in a massive cost cutting exercise. Given wages and salaries are major costs to most businesses, the likely
outcome is that employees en masse lose their jobs. In many cases of unexpected corporate collapse,
employees have suffered along with creditors, customers, communities, shareholders, and others; see, for
instance, Clarke et al. (2003) and (Clarke and Dean (2007).
15 See note 1 and reference therein.
16 Consider the OK Tedi mining dilemma for BHP in Papua New Guinea (from 1975 to, arguably, current times)
where the company’s mining interests conflicted with reportedly their own environmental concerns.
17 In addition their activities caused untold damage to the local river systems and social, economic, and political
environment. Details available at www.theaustralian.com.au/business/mining-energy/png-ups-the-ante-in-with
and
-bhp-over-ok-tedi-mine-row/story-e6frg9df-1226567072656# www.actnowpng.org/project/Ok%20Tedi
, accessed November 2013.
%20mine
18 Archival excerpt from Four Corners, available at www.abc.net.au/news/2013–01–07/an-radio-doco3a-ok-tedi
/4455092
19 From excerpt available at , accessed November 2013.
www.abc.net.au/pm/content/2012/s3656207.htm
20 By way of example: ‘During construction Ok Tedi’s tailings dam failed. The company made the fateful
decision to put all its waste directly into the creeks that run into the Ok Tedi and Fly Rivers. By the 1990s
hundreds of millions of tonnes of waste clogged those waterways, destroying thousands of hectares of forest
and inundating villages and vegetable patches.’ Available at ,
www.abc.net.au/pm/content/2012/s3656207.htm
accessed November 2013.
21 See Collins (2001) and Collins and Porras (1994). They are also mentioned in Freeman et al. (2004).
22 Refer to the Report of the Inquiry into Certain Australian companies in relation to the UN Oil-for-Food
Programme, Volume 1, Summary, Recommendations and Background, under Prologue and Summary,
available at , accessed June 2014.
www.oilforfoodinquiry.gov.au/
23 Further details at ‘AWB response to Oil-for-Food Inquiry Report’ (2006), available at www.awb.com.au
/investors/companyannouncements/mediareleases/2006
mediareleases/AWBresponsetoilforfoodinquiryreport.htm, accessed June 2014.
24 , Vol.
Report of the Inquiry into certain Australian companies in relation to the UN Oil-for-Food Programme
4, Findings, available at www.oilforfoodinquiry.gov.au/agd/WWW/rwpattach.nsf/VAP
/(22D92C3251275720C801B3314F7A9BA2)_Volume%2BIV%2B(21Nov06)-CD.pdf/$file/Volume%2BIV
, accessed June 2014.
%2B(21Nov06)-CD.pdf
25 Refer to the Report of the Inquiry into Certain Australian companies in relation to the UN Oil-for-Food
Programme, Volume 1, Summary, recommendations, and background, available at www.oilforfoodinquiry
, accessed June 2014.
.gov.au/
26 Ibid., p. xiv.
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41
27 Ibid., under summary.
28 Ibid., p. xi.
29 Recall the details of the AWB’s reform agenda in the ‘AWB response to Oil-for-Food Inquiry Report’ (2006).
30 The Royal Commission into the HIH case provides examples. A summary of relevant points are available in
the article by Mills and Marjoribanks ‘The HIH legacy: Corporate governance and shareholder value,’
available at ,
www.findlaw.com.au/articles/1431/the-hih-legacy-corporate-governance-andshareholde.aspx
accessed December 2013.
31 See Business Roundtable (2012, p. 1).
32 ‘Business Roundtable is an association of chief executive officers of leading U.S. companies with more than
$6 trillion in annual revenues and more than 12 million employees. Member companies comprise nearly a
third of the total value of the U.S. stock markets and represent nearly a third of all corporate income taxes paid
to the federal government’ (Business Roundtable, 2012, p. 1).
33 Ibid.
34 Countries’ corporate governance principles are available at www.ecgi.org/codes/documents/brt_cgov
_principles_27mar2012_en.pdf
35 Margret (2012, p. 68) provides an historical chronology of governance issues.
36 The HIH saga in Australia was of international significance. Details of the Royal Commission are published in
the report of Justice Neville Owen (2003).
37 ‘Curiously, despite the hullabaloo surrounding the governance movement, nothing in the regimes introduces
principles by way of controlling devices that have not been in the corporate legislation for over 160 years’
(Clarke and Dean, 2007, p. 51).
38 See, for instance, Steinberg (2011, p. 261).
39 Steinberg (2011, p. 286) explained: ‘Boards should be allowed to operate in an environment where
institutional and other shareholders are permitted to appropriately exercise reasonable rights, but where boards
are positioned to retain continuity, ensure the right mix of knowledge and skills in the boardroom, and operate
so that the tough issues are debated in a collegial manner.’
40 Steinberg (2011, pp. 286–287).
41 Refer to, for example, Margret (2012, pp. 41–68) on solvency and directors’ duties; Clarke and Dean (2007,
pp. 128–159) on corporate legal entities, moral and legal issues.
42 Briefly: ‘A microeconomic concept founded in neoclassical economics that states that firms (corporations)
exist and make decisions in order to maximize profits,’ available, with further explanation, at www
.
.investopedia.com/terms/t/theory-firm.asp
43 Refer, for instance, to Gray et al. (2014); Adams (2011); Adams and McNicholas (2007).
44 See Adams (2008) with regard to CSR, risk, and risk management.
45 A key article with regard to changing theories of business is: Drucker (1994) ‘The Theory of the Business’,
, September. The date of the article does not detract from the relevance of its content
Harvard Business Review
to current times and business situations.
46 Ibid.
47 Adams and Frost (2006) provided a meaningful discourse in: ‘Accounting for ethical, social, environmental
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42
and economical issues: Towards an integrated approach.’
48 Available at , accessed December
www.iaa.govt.nz/policy-manual/part-c/difference-personal-professional.asp
2013.
49 Further details available at , accessed December 2013.
www.ivysea.com/pages/ldrex_0601_01.html
50 Ibid.
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