Seeing the wood for the trees: ‘Shades of Grey’ ethics case study
ICAS has updated its ‘Shades of Grey’ ethical dilemma case studies publication. This latest edition refreshes the original ‘Shades of Grey’, published in 2009, and features 19 case studies including a number of new scenarios.
The dilemmas are intended to cover a wide range of situations that might be faced by chartered accountants in business or in practice. Each scenario is focused on you and at the end of each scenario the requirement is for you to make a decision and do something.
In the following case study extracted from the publication, you are the Chair of a paper-making company considering sourcing raw material supplies from a lower-cost overseas supplier. Although costs would be reduced, the overseas supplier operates in a politically unstable country whose government has no regard for preservation of the environment. Moving to the overseas supplier could also put your existing nearby supplier out of business with the loss of local jobs.
Download ‘Shades of Grey – Ethical dilemmas’
Seeing the wood for the trees
You are the Chair of Rusppay plc, a long established specialist paper-making company. The company’s next board meeting is due to be held next month. Top of the agenda for the meeting is the possibility of changing the company’s source of raw materials.
This has come about because, for some time now, the company has experienced falling profit margins. All of the directors had been tasked with identifying ways of reducing the cost base. One obvious means would be to reduce the workforce but you only want to revert to this option as a last resort – the workforce has been loyal and hard working.
The production director responsible for buying wood pulp, the primary raw material used in the production of paper, has recommended that the board considers shifting contracts away from existing Scottish suppliers in favour of lower-cost overseas suppliers. Supporting this view, the Chief Executive (CEO) has specifically identified Comy, a company based in Sangala, a developing country. It is known that the CEO’s family have an involvement in this company and that, personally, the CEO has a 10% equity stake. Despite the obvious conflict of interest, there is no doubt that this direct link to the supplier would be of benefit to Rusppay plc if it decided to take up this option. It would reduce the risks of dealing with a new supplier, particularly one which is based overseas too.
In conversations you have had with some of the other directors, they have expressed concern that the image of Rusppay plc in the home market will be damaged by withdrawing business from domestic suppliers. At present, most of the pulp is purchased from one of the Scottish suppliers, Doowy Ltd, with the contract making up over 70% of that supplier’s business. The expected cost reductions for Rusppay plc are undeniable, but there is a fear that moving the contract will put the existing supplier out of business – and there would be the associated knock-on effects in the local community – Doowy Ltd is based in a small town only a few miles from where Rusppay plc is based.
It is also well known that Sangala, the country from which it is proposed that the pulp be sourced in future, adopts indiscriminate policies towards deforestation (clearing forest areas), causing irreparable damage to the eco-system. Sangala’s government has consistently argued that the improvement in the quality of life of its people in rural areas must take priority over natural resources. Additionally, the political environment is fragile and the possibility of a coup is ever-present.
Another factor is that only just under three years ago Rusppay plc received a local enterprise agency grant for £3.5m which was used towards the cost of renewing some of the company’s outdated equipment. This grant was partly awarded on the basis of retaining jobs in the local area. The qualifying period will expire in three months’ time and the grant will not thereafter be repayable – however, you are trying to balance the logic of Rusppay plc retaining the grant, which was partly awarded to support local employment, with terminating its contract with Doowy Ltd which would undoubtedly damage employment in a nearby town.
Having read all the board papers in readiness for the meeting, and having spoken to the other directors, you are contemplating what recommendations you will make.
What do you do now?
What are the readily-identifiable ethical issues for your decision?
For you personally
The ICAS Code of Ethics states the following in relation to the fundamental ethics principle of Integrity:
“111.1 A1 Integrity involves fair dealing, truthfulness and having the strength of character to act appropriately, even when facing pressure to do otherwise or when doing so might create potential adverse personal or organisational consequences.
Fair dealing includes respecting values of equality, diversity and inclusion.
111.1 A2 Acting appropriately involves:
(a) Standing one’s ground when confronted by dilemmas and difficult situations; or
(b) Challenging others as and when circumstances warrant,
in a manner appropriate to the circumstances.”
In addition, the fundamental ethics principle of Professional behaviour states:
“R115.1 A professional accountant shall comply with the principle of professional behaviour, which requires an accountant to:
(a) Comply with relevant laws and regulations;
(b) Behave in a manner consistent with the profession’s responsibility to act in the public interest in all professional activities and business relationships; and
(c) Avoid any conduct that the accountant knows or should know might discredit the profession.”
What are the ethical considerations in relation to the proposal to switch from a domestic supplier to an alternative supplier in a developing country which has an unstable political environment?
Can the CEO be objective in this decision when there is a clear conflict of interest due to their personal 10% equity stake as well as their family’s involvement in Comy?
As Chair, what will you advise the Board to do?
How will this impact your personal reputation as a Chartered Accountant?
For the company
Does the company have a set of ethical values, including sustainability values, which it can refer to when faced with difficult dilemmas such as this? Are the decisions being made, and the way in which they are being made, in line with the organisation’s values?
The company will have technically complied with the legal terms of the grant it received but is there a wider duty to be considered to the local community? Although the legal terms might not require clawback after three years have elapsed, the spirit and underlying intention of the awarding of the grant is likely to have been for the wider local community to benefit for a considerably longer period of time. Putting an employer out of business only a few miles away just as the claw back period has elapsed is likely not to be viewed favourably.
Is the company willing to accept the supply chain risks associated with dealing with a supplier which is located in a country with an unstable political environment? Have the modern slavery risks been considered?
Is the company willing to accept the negative media coverage, and damage to its reputation, that might result if it terminates the contract with a local supplier - which could put the supplier out of business - in favour of a company in which the CEO has an ownership interest?
Is the company willing to be associated with a company situated in a country where there is no regard for the preservation of the environment?
Who are the key parties who can influence, or will be affected by, your decision?
You; the Chief Executive; the other directors of Rusppay plc; the employees of the various companies; the shareholders of Rusppay; the directors and shareholders of Doowy Ltd; the directors and shareholders of Comy; the local enterprise agency; and the local community.
What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?
Integrity | Tone from the top is critical. In the UK, under Section 172 of the Companies Act 2006, you are aware that as the chair you must act in the way which would be most likely to promote the success of the company, and, in so doing, have regard to other matters impacting stakeholders, including considering the likely consequences of any decision in the long term and maintaining a reputation for high standards of business conduct. Does your company have a clearly defined set of corporate values? If so, where do the sustainability related issues fit into these? How do you deal with the CEO’s financial interest in the potential supplier? Integrity involves fair dealing. There is a need for you to give balanced consideration to the likely impact on Rusppay plc of changing/not changing suppliers. What are the technical aspects - the laws and standards? Who will be affected? What are the anticipated consequences – quantifiable and non-quantifiable? What are the threats to reputation? What feels appropriate? |
Objectivity | There is a need to objectively balance all the pros and cons of the decision, taking account of the longer-term and not just the shorter-term issues. Are the other members of the board able to be objective on this matter? |
Professional competence and Due care | Assumed. |
Confidentiality | Assumed. |
Professional behaviour | You need to ensure your recommendation to the Board is consistent with the accounting profession’s responsibility to act in the public interest. There is a need to explain your recommendation and allow the other board members to fully understand the ramifications of their decision. |
Is there any further information (including legal obligations) or discussion that might be relevant?
Does your company have a set of values/code of conduct which may have a bearing on your decision?
Are there any other options open to the company in relation to potential cost savings?
If the contract was awarded to Comy, would Rusppay plc have a back-up plan if any future political unrest hindered the supply of raw materials?
Are there any international embargos on trading with companies in Sangala? There would need to be clarity regarding the legal aspects of trading with a supplier in this country.
Would transacting with a company in Sangala expose the company to foreign currency risk that could not easily be mitigated?
What other suggestions for reducing the company’s cost base have been received from board members?
Is there a conflict between the guardian and commercial strands of an accountant’s responsibilities?
No.
Based on the information available, is there scope for an imaginative solution?
Is there any scope for negotiating a price reduction with your existing supplier, Doowy Ltd? Could some, but not all, of the raw material supplies be switched to a different supplier?
Are there any other comments?
In deciding on a course of action, you should apply the reasonable and informed third party test in the ICAS Code of Ethics and consider if a reasonable and informed third party would likely conclude that your actions were appropriate. Conduct that might discredit the profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession.
Documentation is encouraged so that there is a record of the issue, the detail of any discussions, and the matters taken into consideration in reaching your judgement and action.
Download ‘Shades of Grey – Ethical dilemmas’
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