interoffice memorandum subject: ethics assigment- New systems inc date: [ 3/18/2012 ]

A number of business ethical conflicts develop due to divergences between different stakeholders’ interests such as; company owners, employees, customers or/and surrounding community. One of the major stakeholders New Systems Inc is experiencing an ethics situation. Alexandra Lopez a certified internal auditor for New Systems Inc has been assigned to the Royal Division for the past two years. Alexandra has found some discrepancies in the company’s asset turnover ratios, which will reduce the company’s ROI (Return on Investments), the base for the division’s performance assessment and bonus system. Other stakeholders are Will Dixon and the Royal Division V.P. Will seems to be bothered with Alessandra findings; however he made a commitment to look into the problem and to rectify any problems before next year’s review. Jean Williams, the Royal Division CFO, is also an important stakeholder, who is considered Alexandra’s mentor and friend. Jean and other key people of the department would be directly impacted by Alexandra’s findings, which will reduce their performance assessment and consequently their bonus; 30% of their base pay is directly related to the company’s ROI. Finally Alexandra’s husband can also exert some influence on her decisions, especially when it involves their personal finances. The main dilemma with Alexandra’s findings started when Jean, her friend, requested Alexandra, informally, to not report her findings, so he and some other key players of Jean’s department could receive their compensation. Not only that, Jean also tried to persuade Alessandra, with the arguments that all the other departments game the system to some extent, and that she would probably not make any friends among the company by reporting the right numbers. Alexandra is in a dilemma because in one hand she should follow the code of ethics, including the integrity, objectivity and confidentiality principles as well as the rules of conduct. However, on the other hand, she could create enemies in the company and destroy her friendship with Jean. Furthermore Alexandra faces a second dilemma, according to Jean, the company’s ROI would be improved, and it is only a matter of time until it is fixed. Therefore, even if Alexandra omits some facts in order to report the higher ROI, in a short period of time, the department would make up the numbers necessary to reach the expected ratio, and everyone would be in a win, win situation. In addition Alexandra will likely be awarded a good promotion this coming year to Audit Manager at the home office as a result of her decisions. Therefore it is important to keep a good relationship with the company. Moreover Alexandra’s husband also believes that she should omit the facts and “go along to get along” in this situation. With the above dilemmas at hand, Alexandra needs to decide if reporting or not the right numbers that affects the Company’s ROI as discussed previously. When faced with dilemmas like that, which engage business ethical conflict, the Integrative Social Contracts Theory (ISCT) should be applied. The ISCT examines the proposed action in four dimensions. The first dimension is if the proposed action is compatible with hypernorms, which are based on universal consensus that evolves well-known global industry standards for example. These norms could include religious, political and philosophical thoughts. For this situation Alexandra could justify taking the action with the thought of justice, since it would not be fair for the Royal Division’s employees to not receive their bonus, given that they have been right at the top in performance, and have been able to attract some good corporate backing for its projects. The second dimension is if the norm is authentic. For this company, based in what Jean said, it is something normal to game the performance measurement and compensations system to some extent. This type of decision and behavior looks like is acceptable by the community in question and the stakeholders are most likely to agree that omitting some facts and reporting the higher ROI is the right thing to do. Even knowing the norm could be authentic, the same norm may not be legitimate, which is the next dimension to be analyzed under the ISCT application. A legitimate norm should be consistent with the hypernorm; the big global ideas that we have to appeal to. In this case we can take into consideration the code of Ethics that is expected to be followed by the company’s auditors. Under the integrity rules of conduct, the internal auditors shall perform their work with honesty, diligence and responsibility as well as to not engage in acts that are discreditable to the profession of internal auditing or to the organization. Moreover, the objectivity rules states that the internal auditors should not participate in any activity or relationship that may impair their assessment. In this case Jean’s relationship may generate conflict of interests. Also, as per the objectivity rules, the internal auditors should disclose all material facts known to them. Following the ISCT process the correct action would be to reject Jean’s request and follow the legitimate norms of Alexandra’s profession. In this case if the norm was considered legitimate the 4th dimension would be to analyze if the norms are compatible with other legitimate norms or not. Additionally to the ISCT reasoning process, if the Consequentialism (Utilitarianism) is applied, the decision of reporting the right numbers is strengthen when the consequences of the possible actions are taken into consideration. For example, if Alexandra decides to report the higher ROI, she could strengthen her relationship with Jean, many employees would receive their bonus and she would have a good chance to get a promotion. However, she could also lose her job for not following the code of conduct, and also she could damage her reputation as an auditor, losing the opportunity of getting the desired promotion. Finally reporting the wrong numbers will not help the company itself in the long run. These analyze also strength the ISCT findings. Although it might seem, at first glance, that it is not a bad idea to not report her findings, when taken into consideration the possible consequences and the ethical norms involved in this action, such decision is unethical and can have irreversible results that would damage Alexandra’s career and the company’s financial results. If the division’s performance assessment and bonus system seems to be unfair for the department’s employees, Alexandra and Jean could propose to Will Dixon, the Royal Division V.P, a change on the performance evaluation rather than lying and omitting to obtain results on the short run.