of Ethics with Impact
By Bruce R. Gaumnitz and John C. Lere
406 of the Sarbanes-Oxley Act requires publicly traded companies
to disclose if they have a code of ethics for senior financial
officers, and if not, why not. Few companies will wish to
explain why they do not have such a code, so it is likely
that those publicly traded companies that do not have a code
of ethics are in the process of developing one. Those companies
that already have a code of ethics are probably reviewing
them for compliance with the law’s requirements.
to the act, a code of ethics comprises standards “reasonably
necessary to promote —
honest and ethical conduct, including the ethical handling
of actual or apparent conflicts of interest between personal
and professional relationships;
(2) full, fair, accurate, timely, and understandable disclosure
in the periodic reports required to be filed by the issuer;
(3) compliance with applicable governmental rules and
in developing or revising a code, a company should make
sure that it addresses honest conduct, conflicts of interest,
disclosure in periodic reports, and compliance with applicable
governmental rules and regulations.
developing or revising a code, however, a company may find
it helpful to consider why it is developing a code and what
it wishes to achieve in that code.
Develop a Code?
companies may develop a code of ethics simply to avoid the
embarrassment of explaining why they do not have one. For
this group, any code that adequately addresses the issues
expressed in Sarbanes-Oxley may suffice. For example, Financial
Executives International (FEI) (www.fei.org/download/CoEmodel.doc)
and Parsons Consulting (www.parsongroup.com/sarbanes-market_position.asp)
have both developed sample codes of ethics.
companies, however, may wish to achieve more with a code
of ethics. As Deloitte & Touche point out in its Guidelines
for Writing a Code of Ethics/Conduct, “there
is no pre-packaged verbiage for a code of ethics/conduct.”
of Ethics Possibilities
of ethics can guide individuals who face novel ethical situations
and serve as a general statement of company expectations
for individuals who face situations with ethical dimensions.
A specific code’s effectiveness depends on the likelihood
that a position in it will influence a decision and whether
it effectively communicates the intended ethical position.
ethical positions, even if expressed in a code of ethics,
are unlikely to have an impact on decisions. To help identify
code statements with potential to impact decision making,
statements can be classified according to whether the senior
financial officer already has a known ethical position.
Code statements for which there are known positions can
be divided further into—
those that express a position with which the senior financial
those that express a position with which the senior financial
officer mildly disagrees; and
that express a position with which the senior financial
officer strongly disagrees.
summarizes these positions and the potential for a code
of ethics to have an impact.
statements addressing ethical issues for which the senior
financial officer does not have a position or that take
a position with which the senior financial officer mildly
disagrees are the ones most likely to have an impact. Here
the individual is probably susceptible to influence and
may even wish or seek guidance. A code statement that relates
to an issue for which the senior financial officer already
has a strong opinion is less likely to have an impact. A
code statement expressing an ethical position with which
the senior financial officer agrees will have no impact
on the alternative selected in a decision.
the code position agrees with that held by the senior financial
officer, it merely reinforces practices that should already
be followed. Although it is impractical to ensure that a
code of ethics includes no statements that express positions
held by the senior financial officer, many such statements
express commonly held ethical positions, such as being honest
and obeying the law. Statements in a code of ethics that
restate commonly held positions are unlikely to influence
statements will have no impact on the action chosen, though
they may serve other purposes, such as reinforcing common
example, a statement that senior financial officers are
expected to comply with applicable governmental rules and
regulations establishes a position that the company’s
senior financial officer hopefully would already hold. If
so, expressing such a position within a code can have no
impact on decisions made by the senior financial officer
because, even in the absence of the statement, this is the
a statement also probably fails to serve as a guide to company
expectations when an individual faces a new ethical situation.
If it is news to the senior financial officer that the company
expects compliance with applicable government rules and
regulations, these are much more fundamental and serious
issues than a code of ethics could address.
some cases, a company may wish to express these positions
while recognizing that doing so will have little impact
on decision making. Reasons for doing so might be to achieve
some sense of completeness or to demonstrate due care to
employees, investors, or the public. Of course, such a statement
would also meet the requirements of section 406.
the same time, a company should be cautious about including
too many such positions in a code of ethics. Comments by
participants in research on codes of ethics suggest that
employees generally tend to dismiss codes of ethics as simple
restatements of common sense or common business practice
or as platitudes with which no one could disagree. A code
of ethics composed primarily of ethical positions with questionable
impact on decision making may not be taken seriously. This
will likely diminish the impact of those positions in the
code that do have the ability to affect decision making.
the position expressed in the code statement disagrees with
a position strongly held by the senior financial officer,
it is also unlikely that the statement will have an impact.
This situation can become problematic because when the senior
financial officer disagrees with the one expressed in the
code, the alternative chosen will generally not be the one
desired by the company. If an individual strongly holds
a strong, contrary position, merely stating an ethical position
is unlikely to change behavior, in the absence of an enforcement
statements with which general agreement exists, the company
will wish to include statements expressing this type of
ethical position even though the statements, by themselves,
may not have the desired impact on some individuals.
in codes of ethics are most likely to have an impact when
they address new situations or when they take positions
with which one mildly disagrees. For example, although keeping
up to date professionally is generally held to be important,
some individuals may not have given it much thought. For
them, a statement that keeping up to date is ethically desirable
behavior will provide guidance and has the potential to
affect their decision making.
section 406 of Sarbanes-Oxley addresses codes of ethics
for senior financial officers, a company may wish to satisfy
the act’s requirements by developing a code of ethics
that includes the senior financial officer as part of a
larger group. The broader the group covered, the more likely
that there will be ethical issues about which some members
of the group do not have positions. For example, all senior
financial officers are probably aware that it is appropriate
to keep company information confidential. Newer members
of the finance staff, however, may not be aware of this.
Therefore, including a statement about maintaining the confidentiality
of information may have an impact on decisions made by some
members of the group.
situations provide the potential for impact. Deciding which
situations are novel requires an understanding of the experience
and background of individuals covered by the code. The lack
of an ethical position, however, does not necessarily indicate
a lack of ethics; it could indicate a need for guidance.
a senior financial office might mildly disagree with the
code’s position. While it is unlikely that a code
can significantly alter a strongly held position, it probably
can affect mildly held positions. Mildly held positions
and no positions are the ones most susceptible to a decision-making
affect decisions, a code must clearly communicate the ethical
position to the individuals making the decision. Words that
have a meaning to one individual, however, often do not
adequately convey that same meaning to others. Clear communication
increases the likelihood of appropriate action.
conflicts of interest. Contemporary American society does
not have a consistent ethic for addressing conflicts of
interest. Codes of ethics of professional organizations
generally adopt one of two ways to handle conflicts of interest.
Some codes require the strict avoidance of conflicts of
interest. Others treat conflicts of interest as acceptable
as long as they are disclosed to affected parties. The Code
of Professional Conduct for CPAs contains elements of both.
Some conflicts of interest compromise the appearance of
independence and must be avoided; others do not impair independence,
but require disclosure and possible recusal. A code statement
that simply says a senior financial officer should ethically
handle actual and apparent conflicts of interest may not
provide guidance to the senior financial officer, because
it does not communicate whether such conflicts should be
disclosed or avoided.
are also legitimate differences of opinion as to when an
“actual and apparent conflict of interest” exists.
If conflicts of interest are a serious issue for a company,
it should clearly identify those that must be avoided and
those that must be disclosed. Some companies may even prefer
to empower an ethics officer to whom all conflicts of interest
must be referred for action.
the Sarbanes-Oxley Act does not specifically refer to the
enforcement of codes of ethics, some companies may wish
to develop specific enforcement mechanisms for their codes.
Their existence indicates the importance a company ascribes
to its code.
mechanisms are particularly important for positions that
differ from those held by individuals covered by the code.
Appropriate discipline can increase a code’s effect
on decision making, because there are always some individuals
that will choose the desired alternative only if they fear
R. Gaumnitz, PhD, and John C. Lere, PhD,
are both professors of accounting at St. Cloud State University,
St. Cloud, Minn.