Ashdene Homes is a house builder, having considerable knowledge and experience in the region around Dhaka where the current housing shortage is centred. The company caters for the mid to lower end of the market, with prices normally below CU500,000, on relatively small and individual sites which tend to be too large for the resources of local builders but too small for the high volume national house builders. Any mass release of land for development in the South East due to government initiatives is likely to be centred in one area. The development of any such land would take many years given delays within the planning process.
The company, worth CU67 million, has looked like a takeover target for a while but unfortunately, the company’s reputation for internal control has been damaged somewhat by a qualified audit statement last year (over issues of compliance with financial standards) and an unfortunate internal incident which concerned an employee expressing concern about the compliance of one of the company’s products with an international standard on fire safety. She raised the issue with her immediate manager but when she failed to obtain a response, she decided to report the lack of compliance to the press. This significantly embarrassed the company and led to a substantial deterioration in their reputation, especially as there have been more press releases about the company’s failure to adhere to the high welfare, health and safety, financial, marketing and ethical standards that the founder practiced when he started Ashdene Homes.
Requirements
(a) Outline the implications of poor ethical standards and damaged reputation on the relationship
between the affected stakeholder groups and Ashdene Homes.
(b) What are the main issues concerned with corporate social responsibility and why might Ashdene
Homes choose to act, or at least claim to act, in a socially responsive way?
(c) Explain, with reference to Ashdene Homes as appropriate, the ethical responsibilities of an
accountant both as an employee and as a professional.
Sample Answers to the Case Study 1: Ashdene Homes
(a) When more than one stakeholder group has reason to question the otherwise good reputation of an organization, the effect can be a downward spiral leading to a general lack of confidence which, in turn, can have unfortunate financial effects. In particular, however, poor ethical standards are likely to affect one or more of the organization’s interactions with:
Customers – Customers will expect certain standards of health and safety and ethical behavior from Ashdene Homes, especially regarding its treatment of employees. The recent damage to their reputation may reduce confidence among customers leading to reduced sales – with a subsequent impact on corporate profits.
Shareholders – Investor confidence is important in public companies and any reputation risk is likely to be reflected in market value. Shareholders may invest in buying shares, or their wealth, tied up in pension funds, may be invested for them by investment firms. The growth in ethical funds management where investment firms guarantee their customers not to invest in ethically-unsound organizations has led to company directors addressing the issue in earnest rather than giving it cursory attention.
Senior management – Poor ethical behavior from them creates a poor perception of the organization in the market. However, poor ethical behavior from those below can also have a negative impact on such executives and make them wish to disassociate themselves from a failing enterprise; the loss of key talent may be sorely felt by those who remain.
Employees – Although not directly affected, poor ethical standards may leave the employee feeling that they no longer have a worthy association with the firm, which may cause them to leave or be de-motivated as a result. Also, if the organization exhibits poor ethical standards, employees may feel that they either can or even should follow suit, and a general decline in standards will follow.
Suppliers – Also not greatly affected, but it may be the case that suppliers decide not to deal with Ashdene Homes because they feel that the poor ethical standards will in some way implicate themselves.
(b) Corporate social responsibility (CSR) is concerned with companies acting in a socially responsible way. It generally refers to business decision-making linked to ethical values, compliance with legal requirements, and respect for people, communities and the environment.
There is a growing view that the best-managed companies are those that are aware of their wider responsibilities to the social community and to the environment. In order to ensure that a company honors those responsibilities and protects its reputation, it is necessary to embed these core values into the policies, practices and programmes of the company’s systems and decision-making processes.
The CSR issues that affect companies vary according to the nature of the company but there are five broad areas where CSR might be relevant:
To treat employees fairly and with respect
To operate in an ethical way and with integrity
To respect human rights
To sustain the environment for future generations
To be a responsible neighbour in the community.
There are several reasons why Ashdene Homes might choose to act in a socially responsible way:
They might want to act voluntarily in order to avoid legislation. For example, to avoid excessive pollution of the environment in their methods of working and by buying materials locally to reduce transport use and avoid allegations of their suppliers adding to deforestation.
They might want to act in an ethical and socially responsible way by making the houses ecofriendly, reducing carbon emissions, having rigorous health and safety checks on their building sites and incorporating recycled materials where possible into the buildings.
They might want to respond to pressure from shareholders. Some institutional shareholders have a policy of investing only in socially responsible and ethical companies.
To protect their reputation.
The risk to the company’s reputation from adverse publicity about social and environmental factors is always difficult to assess. Ashdene Homes will be aware that adverse publicity can have a damaging effect on customer goodwill – and sales and profits. Management might need to consider CSR as a strategic issue when evaluating their strategic options.
(c) Ethical responsibilities of a professional accountant
A professional accountant has two ‘directions’ of responsibility: one to his or her employer and another to the highest standards of professionalism.
Companies provide a Code of Ethics that all employees are expected to follow to maintain a culture of corporate ethics. Issues to be included in such a Code of Ethics are:
Avoiding conflicts of interest
Compliance with laws and regulations
Rules about disclosure or avoidance of opportunities for personal gain through use of company property or their position in the company
Confidentiality – extending to absolute discretion of all sensitive matters both during and after the period of employment
Fair dealing with customers, suppliers, employees and competitors
Encouragement to report illegal and unethical behavior
The responsibilities also include the expectation that the accountant will act in shareholders’ interests as far as possible and that he or she will show loyalty within the bounds of legal and ethical good practice.
In addition to an accountant’s responsibilities to his or her employer, there is a further set of expectations arising from his or her membership of the accounting profession. In the first instance, professional accountants are expected to observe the letter and spirit of the law in detail and of professional ethical codes where applicable (depending on country of residence, qualifying body, etc).
In any professional or ethical situation where codes do not clearly apply, a professional accountant should apply ‘principles-based’ ethical standards (such as integrity and probity) such that they would be happy to account for their behavior if so required. Finally, and in common with members of other professions, accountants are required to act in the public interest that may involve reporting an errant employer to the relevant authorities. This may be the situation that an accountant may find him or herself in at Ashdene Homes. It would clearly be unacceptable to be involved in any form of deceit and it would be the accountant’s duty to help to correct such malpractice if at all possible.
