343
Glossary
AAA model a seven-step ethical decision-making
model developed by Langenderfer and Rockness
(1989)
adverse selection may occur when the agent
(manager) is in the possession of information that
is not known to the principal (shareholder)
agency theory describes the potential o pportunistic
behaviour of agents that have the capability to
transfer wealth from the owners to themselves
asset misappropriation is a fraud committed by an
employee involving the theft of a companys assets
audit the application of procedures for the
purpose of expressing an opinion on the reliability
of managements representation in the financial
statements
behavioural controls formal (policies and proce-
dures) and informal organisational controls (ethical
climate) that influence member behavioural choices
best owner the owner capable of maximising
company value
blockholder a shareholder owning a large number
of shares
blowing the whistle the activity of disclosing
information externally that is normally regarded
asconfidential within the firm, but the disclo-
sureofwhich is deemed to be in the publics best
interest
board of directors a group of people elected by
shareholders charged with the overall direction,
control and responsibility of the organisation
bribery involves offering, giving, receiving or
soliciting anything of value in order to influence
the decision or behaviour of an employee or public
official
busy directors directors with many other board
positions
Dellaportas_Glossary.indd 343
care (ethics of) care ethics emphasises concrete
relationships and the obligation to care for those who
are dependent or vulnerable to ones decisions
CEO duality occurs when the CEO is also the chair
of the board
chief executive officer (CEO) the highest ranking
executive responsible for a companys operations
client-centred conflicts of interest conflicts
between the client and the professional or firm of
professionals
code of (professional) ethics a set of rules designed
to induce ethical behaviour and encourage pub-
lic confidence in the profession and professional
practice
codetermination occurs when employees have a
role in the management of the firm with employee
representation on the board of directors
cognitive moral reasoning and development the
processes or logic that individuals use in making a
decision of an ethical nature
commission compensation from a third party for
recommending or referring a product or service
compensatory justice a type of justice that is
concerned with restoring what has been lost as the
result of a wrongful act
competence the attainment and maintenance of a
level of knowledge from formal education, training
and continual professional development, that enables
a professional to render services with expertise
compliance performing duties in conformance with
industry standards and other regulatory require-
ments promulgated by private and government
standard-setting authorities
confidentiality to ensure that information acquired
in the course of ones work is not disclosed to a third
party without express authority
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 344
conflict of interest a situation that undermines the
judgment of a professional at the expense of those
the professional has an obligation to serve
contingent fee a fee calculated on a predetermined
basis relating to the outcome or result of a transac-
tion or the work performed
contingent governance the notion that banks will
only intervene in company operations when they are
distressed
conventional level represents a level of moral
reasoning that conforms to and upholds rules,
expectations or conventions
corporate code of conduct an authoritative
statement of values and principles designed to set
a minimum standard of acceptable behaviour and
guide organisational members in resolving ethical
conflicts
corporate culture comprises the values, beliefs and
traditions that influence the behaviour of organisa-
tional members
corporate governance encompasses the direction,
control mechanisms, procedures and relationships
involved in the economic, legal and operational
performance of a corporation
corporate social responsibility the way in which
firms seek to align the interests of owners and other
stakeholders with the long-term best interests of
society
corruption refers to schemes in which fraudsters use
their influence in the business to obtain a benefit,
usually by way of bribes
creative accounting or earnings management is the
process of interpreting accounting standards in a way
that makes financial statements appear different from
the true state of an entitys economic affairs
cultural relativism holds that the standards that
guide ethical behaviour are those that have been
established by the host country
decision-making the process of making a choice to
achieve a desired result from among two or more
alternatives
Dellaportas_Glossary.indd 344
Glossary
decision-making model provides a systematic
framework to arrive at the best course of action
deontology (non-consequential theories) deon-
tological theories define good by its intrinsic value
regardless of whether its obedience produces
undesirable consequences. The intention of the act
itself is more important than its results. In simple
terms, an act or decision is right because it is the
right thing to do. The best known examples of
non-consequential theories are the rights and justice
theories
dependent directors see executive directors
deprofessionalisation the diminution of professional
judgment with increasing regulation
descriptive theory a theory developed from
detailed observation of existing practice culminating
in the construction of generalised conclusions
director a person who is an appointed or elected
as a member of the board of directors of a com-
pany who has the responsibility for determining and
implementing the companys policy
disintermediation occurs when owners invest
directly in companies rather than through an
intermediary such as banks
due care the quest for excellence in the provision of
professional services and acting in the best interests
of those who rely on those services
earnings management occurs when companies
manipulate or misrepresent their true financial posi-
tion either directly or through accounting practices
that may follow the letter of accounting standards
but deviate from the spirit of the standards
egoism an ethical egoist is one who evaluates the
rightness of a proposed action by choosing a course
of action that maximises the net positive benefits to
themselves
employer-centred conflicts of interest conflicts
arising between the professional in business and the
employing entity
entitlement is a right or a claim of ownership, or to
have another behave a certain way
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 Glossary
entrenchment when managers create barriers which
make it difficult to fire them so that they then stay on
for too long
equality claims that every person is entitled to
equal treatment under the law, is entitled to be
given equal opportunity, has equal worth and should
receive equal rewards
ethical consumerism the purchasing behaviour
of customers influenced by trust and loyalty in
the company acquired by producing high quality,
reliable and safe products
ethical decisions what should be done to achieve a
desired objective consistent with and supported by
principles of good conduct
ethical decision-making the process of identifying
a problem, generating alternatives and choosing
among them so that the alternative selected
maximises the most important ethical values while
achieving the intended goal
ethical dilemma a conflict between moral values or
principles, in which to support one principle would
result in transgressing the other
ethical egoism people should do what benefits
them most
ethical issue two or more equally compelling and
competing alternatives give rise to positive and
negative consequences
ethical sensitivity the ability to recognise the ethical
dimension of situations
ethics represents the fundamental principles that
guide right from wrong in human conduct
ethicsbusiness refers to written and unwritten
codes of principles and values that govern the way
corporations behave towards their stakeholders
ethicspersonal the values individuals rely upon to
make ethical decisions and behave accordingly. See
personal ethics
ethicsprofessional the discharge of a duty of profes-
sional care consistent with the norms of the profession
in which the member practises. See professional ethics
Dellaportas_Glossary.indd 345
345
exclusionary closure achieving market control by
restricting access to the profession to a limited
group of eligible people
executive directors (or dependent directors or
inside directors) are dependent because they are
employed by the firm as part of the management
team
executives (see also managers) the people in
charge of the company, subunits or work groups and
who have staff who report to them
facilitating payments are made to speed up a
result (such as a licensing process) that would have
happened anyway
fairness refers to the just distribution of benefits as
an equitable reward for contributions or efforts
fiduciary relationship when the professional is in a
position of truest and the client relies on the profes-
sional for expert judgment and advice
financial statement fraud involves the intentional
misstatement or omission of material information
from the organisations financial reports to make an
organisation appear more profitable than it really is
founder the person who established the business
fraud is a theft committed in the course of employ-
ment involving the use of deception to obtain a
financial advantage
free-rider one who consumes or enjoys the benefit
accruing from the efforts of others but does not con-
tribute (or contributes little) to the collective effort
group-think denotes how an individuals attitudes
yield to the consensus of the group
guanxi is a special type of relationship based on
trust and loyalty providing preferential treatment to
members of the in-group
happiness a state of mind or feeling of content-
ment, satisfaction and pleasure that is held to be the
ultimate goal of consequential ethics
horizontal keiretsu consists of companies in
different industries
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 346
independence being free from any interests or
relationships, whether in fact or appearance, that
impair objective judgment
independent directors see non-executive
directors
inside directors see executive directors
insider trading occurs when the professional
violates the duty of confidence and uses the infor-
mation obtained from the client to gain a personal
financial advantage
institutional investor an organisation that trades
shares in large amounts usually for the benefit of
others (e.g. pension funds) attracting preferential
treatment such as lower commissions
integrity being straightforward, honest, sincere and
using ones convictions to withstand pressure from
significant others to impair integrity
intermediation occurs when banks act as an inter-
mediary between the company and shareholders
internal whistleblowing occurs when the employee
discloses sensitive information on company matters
within the organisation rather than outside the
organisation
justice (theory of) the theory of justice focuses
on how fairly our decisions and actions distribute
benefits and burdens among members of the group.
An unfair distribution is an unjust act, and an unjust
act is a morally wrong act
keiretsu the distinctive Japanese characteristic
ownership mode in which groups of companies are
loosely connected by cross-ownership
kickbacks are payments made by vendors to
employees of the purchasing companies to enlist
the employee in directing purchases to the vendor
loyalty is a devotion to protect and advance the
interests of one to whom an obligation is owed
Machiavellian a person who is manipulative,
emotionally detached from others, believes that the
ends justify the means, and has disregard for moral
standards
Dellaportas_Glossary.indd 346
Glossary
managers (or executives) the people in charge of
the company, subunits or work groups and who have
staff who report to them
mechanisms of governance processes or practices
that serve to mitigate agency problems
moral hazard arises when the principals (the share-
holders) bear the cost of the risk-taking behaviour of
the agents (the managers)
moral minimum provides the threshold or
minimumobligations for businesses operating
internationally
nepotism occurs when favouritism is shown to
relatives or close friends by those with power or
influence in an organisation
non-executive directors (or independent directors
or outside directors) are independent when
they have no ties or special interest to the firm
such as ownership, employment or business
relationship
normative ethical theories provide the basis upon
which judgment is used to solve moral dilemmas by
establishing p
rinciples that are used to determine
right from wrong. N ormative ethical theories are
normally classified into two types, consequential and
non-consequential
normative theory a theory that provides a standard
or guiding principles on what should or ought to
happen and not what does happen
objectivity an impartial attitude that has regard for
considerations relevant only to the facts at hand
occupational closure see exclusionary closure
opportunity represents the ability to commit fraud,
to conceal it, and avoid being detected
outrage costs represent excessive CEO compen-
sation that embarrasses or causes damage to the
CEOs reputation
outside directors see non-executive directors
partner a member of a firm of professionals who
hasoverall responsibility for managing the affairs of
clients
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 Glossary
pay-for-performance represents a compensation
package in which changes in compensation are the
result of changes in measures of firm performance
personal ethics a measure of an individuals moral
reasoning abilities as measured by Kohlbergs theory
of moral reasoning and development. See ethics
personal
philanthropy the practice of performing charitable
or benevolent actions to increase the wellbeing of
humankind
post-conventional level represents the ethics of
conviction to self-determined moral principles
pre-conventional level reflects a level of moral
reasoning that is exclusively self-centred
pressure an inescapable force inducing stress in the
victim to restore their prosperity
profession a community of people bounded by the
activities they perform based on a common theoreti-
cal background acquired through formal education
and professional socialisation
professional association a group of people in a
learned occupation responsible for controlling entry
into the profession and maintaining standards of
professional and ethical practice
professional authority superior knowledge and exper-
tise that creates a dependent relationship with clients
and that places the professional in a position of power
professional behaviour behaviour that is consistent
with the good reputation of the profession
professional ethics acting in ways that are consist-
ent with the professional duties and responsibilities
entrusted to one in a professional role. See ethics
professional
professional in business is one who earns a salary
rather than a fee and is employed in commerce and
industry or the public sector
professional judgment to diagnose a situation and
be able to draw inference from professional stand-
ards when coming to a conclusion on the treatment
required in a particular problem
Dellaportas_Glossary.indd 347
347
professional space (occupational space) profes-
sional space refers to a field of practice that is per-
formed exclusively by members of the profession
professionalisation a form of licensing that includes
the acquisition of formal education combined with pro-
fessional development and practical work experience
professionalism see professional ethics
proprietary companies are not listed on the
stock exchange and cannot issue shares for public
subscription
psychological egoism is a descriptive theory of
human nature concerned with explaining how
people do in fact pursue their interests
public companies companies that issue shares
which are traded on the stock exchanges
public interest a duty to safeguard and advance the
interests of the public before others
public practitioners professionals, including the
firm of professionals, employees and partners, who
provide professional services such as audit, tax or
consulting, to clients
public service a commitment to prioritise the
interests of clients and society ahead of oneself
rationalisation represents statements that justify
criminal behaviour in order to maintain a self-image
of decency
referral the process of obtaining advice or services
from experts for the special needs of the client
related parties two parties who are joined by a
special personal or formal business relationship
relationship banking refers to the relationship
between a company and its bank that involves
personal relationships and information transfers to
assess the financial risks involved in the companys
activities
rights (theory of) the theory of rights recognises
that all people have rights which imposes an obliga-
tion on each person to respect the rights of others.
According to this theory, a good decision is one that
does not impinge on the rights of another
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rule utilitarianism moral rules of behaviour that
maximise positive consequences (happiness) to
society
satisfice management decisions that are
satisfactory or adequate
selection-socialisation a process of moral regression in
the firm hierarchy that results from management pro-
moting only those employees that share common values
self-interest threat when a firm or a member of a
firm can benefit from financial or other self-interest
conflicts with a client
self-interest a personal benefit such as career
advancement or financial or reputational advantage
self-regulation denotes control by a governing body
over the activities of its members
share option a contract that gives the holder the
right to purchase the underlying share at some
predetermined price at a future date
shareholders (or stockholders) individuals or
entities that own shares of a for-profit corporation
short-termism represents a focus on short-term per-
formance at the expense of long-term sustainability
social network a set of agents (firms, board mem-
bers, owners) connected by a set of ties (ownership,
board interlocks)
stage of moral development a structure of thought
that is concerned with how judgments are made and
why one formulated the judgment
stakeholder a person or organisation that has a
direct or indirect stake in a company because it can
affect or be affected by the companys actions
stakeholder theory emphasises how a company
is part of the social system in which it recognises a
variety of internal and external groups of importance
to the company in addition to shareholders
stress a tension or strain that results from challenges
that exceeds ones capabilities
tax avoidance arrangements that comply with the
letter of the law, but are not within the spirit of the
Dellaportas_Glossary.indd 348
Glossary
law, allowing some taxpayers to avoid their taxation
responsibilities
tax evasion actions or arrangements that allow a
taxpayer to unlawfully escape their true tax liability
tax minimisation occurs when a clients taxation
affairs are legitimately arranged to reduce the
amount of tax payable
teleology (consequential theories) consequential
theories define right from wrong solely by the results
of an act or decision
trust the transfer of control to a professional on the
optimistic expectation on the part of a client about
the outcome of an event that is dependent on the
behaviour of the professional
tunnelling occurs when controlling owners take
money or direct business to themselves for personal
gain
Type 1 agency problems arise when the managers
(agents) interests are not aligned with the sharehold-
ers (principals) interests
Type 2 agency problems occur when there are
conflicts of interests between large and small
shareholders
Type 3 agency problems occur when the interests
of shareholders are pursued at the expense of the
welfare of stakeholders
universalism holds that there are absolute moral
truths which all entities obey at all times without
exception
utilitarianism concerned with making decisions
that produce the greatest balance of pleasure over
pain for the greatest number of people: an ethical
decision is one that maximises the net benefit for the
greatest number of people
value-based ethics an approach to ethics in which
ethical behaviour is the result of values such as
integrity, compassion and good character
values those things we regard as having ultimate
importance or worth, often referred to as principles
or beliefs
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 Glossary 349

vertical keiretsu consists of groups in the same whistleblower one who has obtained knowledge of
industry in which suppliers are united as part of the an act or decision that has caused unnecessary harm to
supply chain others and has informed an external party of this fact

virtue ethics an agent-based ethical theory that is whistleblowing the activity of disclosing information
focused on character and traits, such as honesty and externally that is normally regarded as confidential
courage that engenders behaviour consistent with within the firm, but the disclosure of which is deemed
such traits to be in the publics best interest

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