Case Study: Coca Cola : 1S(A: 00117003917- 00617003917) ( B: 06317003917- 06717003917)

Methodology : The four cases will be compared by studying a CSR conflict that each one of the
multinationals faced and that became, to a certain extent, a turning point for the CSR policies of these
multinationals. Each of the multinationals’ response to the conflict will be analysed, how the company
resolved the conflict and whether the company implemented specific CSR policies with measurable
targets as a response to the conflict. The research is based on desk research. The article makes use of
publicly available information on the company’s website, online newspapers and non-governmental
organization (NGO) reports, as well as academic journals and books. The parent companies of the
multinationals are based in different countries: Japan and the US. This means that different legal
systems and jurisdictions are applicable. This article will not look at the legal systems of the US and
Japan concerning the disclosure of annual reports and sustainability reports, since this exceeds the
scope of the article.

Coca Cola

Coca-Cola’s profile

Coca-Cola started its business in 1886 as a local soda producer in Atlanta, Georgia (US) selling about
nine beverages per day. By the 1920s, the company had begun expanding internationally, selling its
products first in the Caribbean and Canadian markets and then moving in consecutive decades to Asia,
Europe, South America and the Soviet Union. By the end of the 20th century, the company was selling
its products in almost every country in the world. In 2005 it became the largest manufacturer,
distributor and marketer of non-alcoholic beverages and syrups in the world. Coca-Cola is a publicly-
held company listed on the New York Stock Exchange (NYSE).Coca-Cola’s CSR policies and reporting.

Coca-Cola’s CSR policies and reporting

In 2007 Coca-Cola launched its sustainability framework Live Positively embedded in the system at all
levels, from production and packaging to distribution. The company’s CSR policy Live Positively
establishes seven core areas where the company sets itself measurable goals to improve the business’
sustainability practices. The core areas are beverage benefits, active healthy living, the community,
energy and climate, sustainable packaging, water stewardship and the workplace.

Coca-Cola has a Code of Business Conduct which aims at providing guidelines to its employees on –
amongst other things – competition issues and anti-corruption. The company has adopted
international CSR guidelines such as Global Compact and Ruggie’s Protect, Respect and Remedy
Framework (Ruggie’s Framework),18 but these guidelines do not seem to be integrated into the Code
of Business. However, these CSR initiatives are included in other activities or policies of the company.
For instance, the UN Global Compact principles are cross-referenced in the company’s annual
Sustainability Reviews and Ruggie’s Framework is partly adopted in the company’s ‘Human Right
Statement’. After the conflict in India, in 2007 Coca-Cola formed a partnership with the World Wildlife
Fund (WWF) and became a member of the CEO Water Mandate, as water is one of the company’s
main concerns.

Every year Coca-Cola publishes a directors’ report denominated ‘The Coca-Cola Company Annual
Report’; the last one was published in March 2011 and comprises the company’s activities during
2010. In this report there is a small section dedicated to CSR and it includes a brief description of the
initiatives in community development and water preservation that the company has developed. Since
2001, Coca-Cola also annually publishes a separate report devoted to CSR called ‘The Coca-Cola
Company Sustainability Review’. These reviews, which are published every two years, are verified and
assured by a third party, the sustainability rating firm FIRA Sustainability Ltd. This verification provides
‘moderate assurance’ on the reliability of the information reported by Coca-Cola. Both reports – the
annual company review and the sustainability reports – are elaborated based on the GRI G3 guidelines,
which were adopted by the company in 2001. Due to its relevance to Coca-Cola’s business, the
company also annually reports on the progress of the water stewardship programme’s targets.

Coca-Cola’s conflicts

Several campaigns and demonstrations followed the publication of a report issued by the Indian NGO
Centre for Science and Environment (CSE) in 2003. The report provided evidence of the presence of
pesticides, to a level exceeding European standards, in a sample of a dozen Coca-Cola and PepsiCo
beverages sold in India. With that evidence at hand, the CSE called on the Indian government to
implement legally enforceable water standards. The report gained ample public and media attention,
resulting in almost immediate effects on Coca-Cola revenues.

The main allegations made by the NGO against Coca-Cola were that it sold products containing
unacceptable levels of pesticides, it extracted large amounts of groundwater and it had polluted water
sources.

The presence of pesticides

Regarding the allegation about Coca-Cola beverages containing high levels of pesticide residues, the
Indian government undertook various investigations. The government set up a Joint Committee to
carry out its own tests on the beverages. The tests also found the presence of pesticides that failed to
meet European standards, but they were still considered safe under local standards. Therefore, it was
concluded that Coca-Cola had not violated any national laws. However, the Indian government
acknowledged the need to adopt appropriate and enforceable standards for carbonated beverages.

In 2006, after almost three years of ongoing allegations, the CSE published its second test on Coca Cola
drinks, also resulting in a high content of pesticide residues (24 times higher than European Union
standards, which were proposed by the Bureau of Indian Standards to be implemented in India as
well). CSE published this test to prove that nothing had changed, alleging that the stricter standards for
carbonated drinks and other beverages had either been lost in committees or blocked by powerful
interests in the government. Finally, in 2008 an independent study undertaken by The Energy and
Resources Institute (TERI) ended the long-standing allegations by concluding that the water used in
Coca-Cola in India is free of pesticides. However, because the institute did not test the final product,
other ingredients could have contained pesticides.

Water pollution and the over-extraction of groundwater.

Coca-Cola was also accused of causing water shortages in – among other areas – the community of
Plachimada in Kerala, southern India. In addition, Coca-Cola was accused of water pollution by
discharging wastewater into fields and rivers surrounding Coca-Cola’s plants in the same community.
Groundwater and soil were polluted to an extent that Indian public health authorities saw the need to
post signs around wells and hand pumps advising the community that the water was unfit for human
consumption.

In 2000, the company established its production operations in Plachimada. Local people claimed that
they started experiencing water scarcity soon after the operations began. The state government
initiated proceedings against Coca-Cola in 2003, and soon after that the High Court of Kerala
prohibited Coca Cola from over-extracting groundwater. By 2004 the company had suspended its
production operations, while it attempted to renew its licence to operate. Coca-Cola argued that
patterns of decreasing rainfall were the main cause of the draught conditions experienced in the area.

After a long judicial procedure and ongoing demonstrations, the company succeeded in obtaining the
licence renewal to resume its operations. In 2006 Coca-Cola’s successful re-establishment of
operations was reversed when the government of Kerala banned the manufacture and sale of Coca-
Cola products in Kerala on the ground that it was unsafe due to its high content of pesticides.
However, the ban did not last for long and later that same year the High Court of India overturned
Kerala’s Court decision. More recently, in March 2010, a state government panel recommended fining
Coca-Cola’s Indian subsidiary a total of $47 million because of the damage caused to the water and soil
in Kerala. Also, a special committee in charge of looking into claims by community members affected
by the water pollution was set up.

The long legal procedures against the Indian government that Coca-Cola had to face were not the only
consequence of the conflict. The brand suffered a great loss of consumer trust and reputational
damage in India and abroad. In India there was an overall sales drop of 40% within two weeks after the
release of the 2003 CSE report. The impact in annual sales was a decline of 15% in overall sales in
2003– in comparison to prior annual growth rates of 25-30%. This highly publicised conflict in India
also caught the attention of consumers in the US. After a series of demonstrations by students who
joined two activist groups in the US, ten American universities temporarily stopped selling Coca-Cola
products at their campus facilities.

Coca-Cola’s CSR policies post-conflicts

Two years before the water conflict in India in 2003, Coca-Cola adopted the GRI Guidelines and started
reporting on sustainability. By 2003, the company had already experienced a few CSR-related conflicts
in other parts of the world. However, none of them had the grave consequence of a loss of trust in the
company and its products by consumers and the public in general.

According to Pirson and Malhotra, the main reason why this controversy ended so badly for Coca Cola
lies in its response to the problem. Coca-Cola denied having produced beverages containing elevated
levels of pesticides, as well as having over-exploited and polluted water resources. By denying all
claims and trying to prove its integrity, instead of demonstrating concern towards the situation, Coca
Cola failed to regain consumers’ trust. The Indian population viewed Coca-Cola as a corporate villain
who cared more about profits than public health. In comparison, previous conflicts experienced by the
company in the US and Belgium were better handled because it included stakeholder engagement in
its strategy.

It appears that the company became aware of its mistake after the controversy had been ongoing for
a couple of years. In 2008 Jeff Sea bright, Coca-Cola’s vice president of environment and water
resources, recognized that the company had not adequately handled the controversy. He
acknowledged that local communities’ perception of their operation matters, and that for the
company ‘(…) having goodwill in the community is an important thing.

Although Coca-Cola still denies most of the allegations, the reputational damage experienced after the
controversy in India pushed Coca-Cola to take damage-control measures. Those measures at first
consisted of statements to confirm Coca-Cola’s integrity. For example, Coca-Cola dedicated a page in
the Corporate Responsibility Review of 2006 to address the controversy. The statement consisted
mainly of providing information supporting its good practices and water management of its operations
in India. But this statement did little to combat the declining sales and increasing losses exceeding
investments.

Coca-Cola gradually changed its strategy to include damage-control measures that addressed the
Indian communities’ grievances. In 2008 the company published its first environmental performance
report on operations in India, which covered activities from 2004 to 2007. It also created the Coca-Cola
India Foundation, Anandana, which works with local communities and NGOs to address local water
problems. But perhaps the most outstanding change of strategy by Coca-Cola consisted of launching
various community water projects in India. An example is the rainwater harvesting project, where Coca
Cola’s operations partnered with the Central Ground Water Authority, the State Ground Water Boards,
NGOs and communities to address water scarcity and depleting groundwater levels through rainwater
harvesting techniques across 17 states in India. These techniques consist mainly of collecting and
storing rainwater while preventing its evaporation and runoff for its efficient utilisation and
conservation. The idea behind this is to capture large quantities of good quality water that could
otherwise go to waste. By returning to the ecosystem the water used in its operations in India through
water harvesting, the company expected that this project could eventually turn the company into a
‘net zero’ user of groundwater by 2009. In the 2012 Water Stewardship and Replenish Report, Coca-
Cola stated that its operations in India have ‘achieved full balance between groundwater used in
beverage production and that replenished to nature and communities – ahead of the global target’.

It appears that the controversy in India was a learning experience for the company, and that it
motivated the company to adopt a more proactive CSR policy on a global scale that focuses on water
management. In June 2007, Coca-Cola implemented a water stewardship programme and committed
itself to reduce its operational water footprint and to offset the water used in the Company’s products
through locally relevant projects. To achieve those commitments Coca-Cola established three
measurable objectives:

(1) Reducing water use by improving water efficiency by 20% over 2004 levels by 2012. The latest data
available from 2010 shows a 16% improvement over the 2004 baseline.

(2) Recycling water through wastewater treatment and returning all water used in manufacturing
processes to the environment at a level that supports aquatic life and agriculture by the end of 2010.
By September 2011, the progress observed concerning this target was 96%.

(3) Replenishing water used by offsetting the litres of water used in finished beverages by 2020
through local projects that support communities and nature (i.e. watershed protection and rainwater
harvesting). Currently, Coca-Cola reports that it holds a global portfolio of 386 community water
partnerships or community-based replenish projects. By 2011, about 35% of the water used in finished
beverages was replenished.

It is noteworthy that Coca-Cola publishes, in addition and separate to the sustainability reports, an
annual water report. In these reports the company publishes assessments of and the progress in its
water initiatives. Some of the assessments are made by the Global Environment & Technology
Foundation, an American NGO experienced in facilitating the creation of public-private partnerships.

Also in 2007, Coca-Cola entered into a partnership with WWF. Its core objectives are increasing
understanding on watersheds and water cycles to improve Coca-Cola’s water usage, working with local
communities in various locations worldwide, and developing a common framework to preserve water
sources. Finally, and also in the same year, the company became a member of the public-private
initiative CEO Water Mandate, which is a public-private initiative that assists companies in the
development, implementation and disclosure of water sustainability policies and practices.
Case Study Walmart 1S(A: 00817003917- 01317003917) ( B: 06817003917- 07217003917)

Walmart

Walmart’s profile

Walmart Supercenters (hereafter Walmart) has a full offering of groceries and general merchandise in
a single store. Walmart offers to its customers a one-stop shopping experience and is the largest
private employer in the US as well as being the world’s largest retailer. It has more than 10,130 retail
units under 69 different banners in 27 countries. They all share a common goal: ‘Saving people money
so they can live better’. Walmart employs 2.2 million associates worldwide68 and generated net sales
of $ 443 billion during the fiscal year of 2012.

Walmart was founded in 1962, with the opening of the first Walmart discount store in Rogers,
Arkansas (US). The company was incorporated as Wal-mart Stores, Inc. on 31 October 1969. The
company’s shares began trading on OTC (Over-The-Counter) markets in 1970 and were listed on the
NYSE two years later.

Walmart’s CSR policies and reporting

Several authors have pointed to Walmart as an important emerging private actor in the
transformation of lawmaking in the CSR field, referring to it as a ‘global legislator.’ They highlight how
Walmart is able to use its contractual relationships to regulate behaviour among its suppliers around
the globe with respect to product quality, working conditions for the suppliers’ employees, and ethical
conduct. Since 2007 Walmart publishes its annual report on its website. It was initially called the
‘Global Sustainability Report’ and later changed to ‘Global Responsibility Report’ in 2011. Mike Duke,
Walmart’s CEO (Chief Executive Officer), says ‘This change reflects the new social and environmental
dimensions we have added to our efforts (…) We believe transparency and accountability are part of
being a good and responsible company.’ Walmart’s annual report publishes its constant and
progressive work towards social responsibility issues. The Global Responsibility Report 2011 is divided
into three main reporting parameters: Environment, Social and Goals.

Walmart’s 2011 report covers every corner of CSR issues. It points out how its successful ‘Sustainability
360’ model has helped Walmart to be the retail leader in the market. It also communicates the
significant progress made by and the new reduction goals of greenhouse gas emissions of its supply
chain by 2015. Walmart’s financial contributions in kind, such as investments in education, health,
commitments to fight hunger, support for local farmers and access to healthier and affordable food,
can also be found in Walmart’s Global Responsibility Report 2011. Walmart’s current performance,
policies and financial figures at first sight portray Walmart as a role model company on CSR.

Walmart’s conflicts

Walmart has faced many obstacles over the years. It seems that legal and social challenges have acted
as important reasons for the development of its code of conduct and annual reporting. This statement
can be illustrated in two relevant cases: Walmart Stores Inc. v. Dukes et al. and the press reports
accusing Walmart of using child labour.

Walmart Stores Inc. v. Dukes et al.

Walmart Stores Inc. v. Dukes et al. started a decade ago and is still being heard by the US Courts. It
commenced as a national class action against Walmart. Plaintiffs Betty Dukes, Patricia Surgeson, Edith
Arana (‘plaintiffs’), on behalf of themselves and others similarly situated, allege that female employees
in Walmart and Sam’s Club retail stores were discriminated against based on their gender. They stated
that they were discriminated against regarding pay and promotion to top management positions,
thereby violating the Civil Rights Act of 1964 (42 U.S.C. §§ 2000e et seq. of Title VII). In 2004, the US
District Court for the Northern District of California certified a national class of female employees
challenging retail store pay and management promotion policies and practices under the Federal Rule
of Civil Procedure Article 23(b)(2). Walmart appealed to the Ninth Circuit in 2005, arguing that the
seven lead plaintiffs were not typical or common of the class. Walmart appealed to the Supreme Court
in August 2010 after the US Court of Appeals for the Ninth Circuit upheld class certification. Finally, the
situation changed on 20 June 2011 when the US Supreme Court reversed the class certification.

The Court held that the nationwide class certification approved by the lower courts was not consistent
with the Federal Rule of Civil Procedure Article 23(a) governing class actions.81 Justice Antonin Scalia
concluded that the millions of plaintiffs and their claims did not have enough in common: ‘Without
some glue holding the alleged reasons for all those decisions together, it will be impossible to say that
examination of all the class members’ claims for relief will produce a common answer to the crucial
question why I was disfavored.’

Dukes v. Walmart Stores, which in 2001 was estimated to comprise more than 1.5 million women,
included all women employed by Walmart nationwide at any time after 26 December 1998. It would
have been the largest class action lawsuit in US history.

Despite the Supreme Court resolution, time, money and efforts invested up to this point, the case did
not end there. In October 2011, the plaintiffs’ lawyers filed an amended lawsuit limiting the class to
female Walmart employees in California.86 This suit is expected to be the first of many additional class
action lawsuits against the retailer at the state or regional level. The new lawsuit, filed in the US
District Court for the Northern District of California, alleges discriminatory practices against more than
90,000 women regarding pay and job promotion as well as requiring non-discriminatory pay and
promotion criteria.

Walmart caught using child labour in Bangladesh

At the end of 2005, the Radio Canada programme Zone Libre made public the news that Walmart was
using child labour at two factories in Bangladesh. Children aged 10-14 years old were found to be
working in the factories for less than $50 a month making products of the Walmart brand for export to
Canada.

Referring to Walmart’s policy at that time consisting of cutting ties with suppliers when violations
occurred, the NGO Maquila Solidarity Network said that ‘cutting and running is the worst possible
response to reports of child labour or other sweatshop abuses’. Critiques said that it only discourages
workers from telling the truth to factory auditors for fear of losing their jobs and encourages suppliers
to hide abuses or to subcontract work to other factories that will escape inspection.

Nevertheless, Walmart ceased business with the two factories immediately. Walmart alleges that
despite its effort to inspect all factories, it is difficult to enforce its own corporate code of conduct with
thousands of subcontractors around the world.

Walmart’s CSR policies post-conflicts

Walmart developed its first Code of Conduct (COC) ‘Standard for Suppliers’ in 1992, which mainly
focuses on quality standards for suppliers only. However, Walmart’s first general report (‘Report on
Ethical Sourcing’), which includes suppliers, customers and associates, was generated in 2006. This
report was elaborated after the filing of the lawsuit by the female employees in 2001 and the
damaging campaigns and press publications accusing Walmart’s suppliers in Bangladesh of using child
labour. Walmart’s reporting culture was imitated by the rest of the companies in the market.
Nowadays, Walmart has been qualified as a ‘global legislator’ in CSR policies.

The 2005 Report on Ethical Sourcing reported that Walmart had ceased to do business with 141
factories, primarily because of underage labour violations. The Report also contains a chart with the
main violations found during the audits. Gender discrimination was not mentioned at any stage
throughout the whole document. Walmart’s 2005 and 2012 COC ‘Standard for Suppliers’ explicitly
establish that Walmart would not tolerate the use of child labour. The 2005 COC sets the age of 14 as
the minimum age for suppliers and subcontractors to hire workers. It also specifies non-discrimination
onthe basis of gender and other personal characteristics or beliefs. It is important to highlight that
gender discrimination was not given any special treatment in the 2005 COC or in the general report.

Walmart’s zero tolerance policy for underage workers was changed in 2005. If a single underage
worker was found in a factory, Walmart ceased business ipso facto. At the beginning of 2005, if two
underage workers were found, the factory would receive a warning and had to change and correct in
the follow-up audit If more than two underage workers were found or the company did not make
corrections, the factory was permanently banned from Walmart’s production. This decision was based
on NGO advice from the Bangladesh case mentioned in the above section. If Walmart cuts business
with these factories, many workers could be laid off for lack of production, suppliers will hide abuses
and workers will not tell the truth to auditors in order not to lose their jobs. Walmart has a strict
corporate code of conduct in the industry but according to investigations Walmart is not able to
enforce its code in developing countries.

Currently, Walmart publishes a full and complete report on CSR issues called ‘Global Responsibility
Report’ which covers the three dimensions of ‘People, Planet, Profit’. This report emphasizes gender
equality and a diverse workforce. Walmart has a Gender Equality and Diversity gender policy that can
be found in its ‘Global Responsibility Annual Report’. In 2009, Walmart took the commitment one step
further with the incorporation of the Advisory Board on Gender Equality and Diversity. The board is
aimed at providing equal and enhanced opportunities for all in top leadership roles. These policies
have generated an increase in female officials and managers from 23,873 employees in 2005 to 25,246
employees in 2010.

Walmart has also committed itself to achieving three goals in its Sustainability Report: using 100%
renewable energy, creating zero waste, and selling products that sustain people and the environment.
These criteria are established and measured by Walmart at the end of the 2012 report. Walmart
indicates every year its completed goals and the progress in the ones that have not yet been achieved.
An example of quantifiable measures is creating a zero waste Walmart by eliminating landfill waste
from US stores by 2025.

Although Walmart does not follow the GRI Guidelines, it has measurable targets on audits. For
instance, Walmart requires its suppliers who produce toys in China to sign up to the ICTI CARE Process.
The ICTI CARE Process was created by the international toy industry to achieve a safe and human
working environment for toy factory workers worldwide. In addition, Walmart conducts internal
validation audits by Walmart’s Ethical Sourcing team. These validation audits ensure that the ICTI CARE
process is properly implemented and that it meets Walmart’s Standards for Suppliers.
Case Study : Apple 1S(A: 01417003917- 01817003917) ( B: 07317003917- 35117003917)

Apple’s profile Apple Inc. (hereafter Apple) was established in 1977 and is registered on the NASDAQ
Global Select Market exchange. According to its Form 10-K ‘Apple designs, manufactures and markets
mobile communications, media devices, personal computers and portable digital music players, and
sells a variety of related software, services, peripherals, networking solutions, and third-party digital
content and applications’. Its products are sold through Apple’s retail stores, online stores and third
parties.

Apple is a world leader in producing innovative electronic goods and technology. In 2011 Apple’s net
sales were estimated at $108.2 million. Its net sales in 2011 increased by 60% compared to 2010.
Apple worldwide employs 60,400 full-time people and 2,900 temporary employees and contractors.
The company utilizes outsourcing through the manufacturing of its products overseas; most of the
factories are located in Asia.

Apple’s CSR policies and reporting

As required by the SEC, Apple has made the Form 10-K annual report available on its website. The
Form 10-K contains – amongst other things – information on Apple’s business strategy and
organisation, the company’s risk factors, legal proceedings and financial data. It also includes the
business conduct policy of Apple: ‘Apple conducts business ethically, honestly and in full compliance
with all laws and regulations. This applies to every business decision in every area of the company
worldwide’. Furthermore, the business conducts deals with corporate governance, information
disclosure, non-corruption and bribery, environmental health and safety.

Apple has considered the GRI G indices relating to the economy, the environment, human rights,
society and labour for its publication on Governance, Product Environmental Reports, Recycling and
Facilities Environmental Report and Supplier Responsibility. For Supplier Responsibility, Apple, for
example, has taken into account the indicator which reports on measures it has taken to contribute to
the elimination of child labour. With regard to Product Environmental Reports, Apple has used the
EN26 performance indicator, and sets out initiatives to lessen the environmental impact of its
products. Apple designs its products with the aim of being as energy efficient as possible, and it is the
only company that can claim all electronic goods are Energy Star qualified. Apple’s products have
become more powerful while, at the same time, fewer materials are used and fewer carbon emissions
are generated.

Almost all of Apple’s products are outsourced for manufacturing overseas. On its Supplier
Responsibility website Apple states: ‘Apple is committed to the highest standards of social
responsibility across our worldwide supply chain. We insist that all of our suppliers provide safe
working conditions, treat workers with dignity and respect, and use environmentally responsible
manufacturing processes. Our actions – from thorough site audits to industry-leading training
programs – demonstrate this commitment’.

The Supplier Code of Conduct (Supplier Code) outlines Apple’s expectations for the suppliers it does
business with. As a condition for doing business with Apple, suppliers have to commit to the Supplier
Code. For the Supplier Code, Apple has adopted the Electronics Industry Code of Conduct (EICC), the
guidelines and standards for the electronics sector. Through onsite audits Apple ensures that suppliers
comply with the Supplier Code. The final assembly manufactures are audited every year and the
components suppliers are audited arbitrarily. Apple obliges its suppliers to respect the human rights of
its workers, to inform the workers of their rights, and to treat them with dignity and respect. Apple
requires from its suppliers that they prevent discrimination, involuntary and underage labour,
excessive working hours and that they pay workers with wages and benefits in accordance with the
applicable laws and regulations.

Apple’s conflicts

The limited transparency of Apple’s supplier sustainability policy has often been criticized in the media.
In February 2010 Apple also turned down two shareholders’ sustainability proposals to establish a
sustainability report on Apple’s environmental policies and the impact that climate change has on the
company. The other proposal was to establish a board of directors’ sustainability committee.

Labour and human rights

A well-known conflict involving Apple’s suppliers is the suicides at Foxconn. It is the largest contracted
electronics manufacturer in the world, with dealings involving Dell and Sony. Foxconn is the
manufacturer of iPhones and iPads and employs over 900,000 workers, of whom 420,000 employees
work at the Foxconn Shenzhen plant. This plant covers 15 factories, including dormitories, a hospital, a
bank, a grocery store and restaurants. The workers live and work inside the complex.

In 2006 the Chinese local press reported on the excessively long working hours and the discrimination
of mainland Chinese workers by Taiwanese superiors. In May 2010 several media sources reported
several cases of suicide at Foxconn. From 2009 to 2010 a total of 13 workers had committed suicide.
The first worker, Sun Danyong, committed suicide after he had been interrogated on the loss of an
iPhone 4 prototype that he had in his possession. When the former CEO Steve Jobs was asked about
the suicides at Foxconn, he responded: ‘Foxconn is not a sweatshop.’

During an undercover investigation it was discovered that the reason for the multiple suicides was
related to internal management. ‘The facilities of Foxconn are fine, but the management is poor,’
revealed Zhu Guangbing, who organised the investigation. According to Audrey Tsui, a professor at the
National University of Singapore Business School, Foxconn maintains a military-style management
approach. The workers were not allowed to interact with each other. Workers who violated the rule
were penalized with a fine or were held to be in contempt by the manager.

The weekly working hours of workers were up to 70 hours, ten hours above the maximum hours set by
Apple’s Supplier Code. The Foxconn factory has good facilities. The workers have access to swimming
pools and tennis courts. Foxconn organises activities such as chess clubs, mountain climbing or fishing
expeditions. But with a 70-hour workweek, employees did not have any time to enjoy these facilities.

However, interviews with several Foxconn workers by Dreamworks China revealed that not all the
employees were dissatisfied. Some believed that the working conditions at smaller factories are worse.
One of Foxconn’s workers stated that employees at Foxconn thought the media had exaggerated the
suicides regarding their connection to Foxconn and that possibly some suicides had a sentimental or
romantic cause. In February 2011, the media reported the child labour issues had worsened at the
suppliers for computers, iPods and iPhones. Apple’s Supplier Responsibility Report 2011 revealed 91
underage workers at the suppliers.

Workers’ health and safety

Concerning workers’ health and safety conditions at the suppliers, in May 2010 two workers were
killed and sixteen employees were injured during an explosion at Foxconn. An Apple spokesperson
stated: ‘We are deeply saddened by the tragedy at Foxconn’s plant in Chengdu, and our hearts go out
to the victims and their families. We are working closely with Foxconn to understand what caused this
terrible event’. In the same month, The Guardian reported that workers from Wintek had been
poisoned by n-hexane, a toxic chemical used to clean the touch screens of iPhones. The employees
complained that the compensation Wintek offered for the health damage was not sufficient. The
workers who did receive compensation were asked to resign from their jobs.

Apple’s CSR policy post-conflicts

Apple makes sure that suppliers comply with the Supplier Code by conducting audits. The audits cover
working and living conditions, health and safety but also environmental practices at the facilities.
According to Apple’s Supplier Responsibility Report 2010, Apple conducted 102 audits in 2009. In 2011
Apple conducted 229 audits, an increase of 80% compared to 2010. An audit is conducted by an Apple
auditor and supported by local third-party auditors.134 In the Supplier Responsibility Report 2010,
published in February 2011, Apple included a paragraph responding to the suicides at Foxconn. In the
Supplier Responsibility Report 2011, Apple reports that during inspections Apple discovered ten
facilities with underage labour violations.

One of the facilities had a large number of underage workers. Because the management did not want
to address the problem, Apple terminated businesses with this facility. Where underage labour has
been discovered, suppliers are required to pay educational expenses, living stipends and lost wages for
six months or until the worker reaches the age of sixteen. In November 2010, Apple set up a training
programme to prevent the future hiring of underage workers. The human resources managers are
trained in Chinese labour law.

Training human resources managers, however, will not solve child labour issues. When the costs of
labour, energy and raw materials rise and there is a shortage of labour, factory owners are forced to
cut costs or to find cheaper labour. Child labour can easily be hidden by providing fake wages and work
schedule data. Also, it is difficult to prevent child labour when underage workers want to work to
provide for their families. The Supplier Responsibility Report of 2012 states that suppliers are obliged
to return underage workers to school and finance their education through Apple’s Child Labour
Remediation Program. Regarding abolishing underage labour, Tim Cook, the CEO of Apple, stated: ‘We
would like to totally eliminate every case of underage employment. We have done that in all of our
final assembly. As we go deeper into the supply chain, we found that age verification system isn’t
sophisticated enough. This is something we feel very strongly about and we want to eliminate totally’.
In the Supplier Responsibility Progress Report of 2011 Apple addressed the issue of the use of n-
hexane. Apple obliged Wintek to stop using n-hexane and required Wintek to repair its ventilation
system and to work with a consultant to improve its environmental health and safety systems. In order
to take action it is important for companies to be transparent about their supply chain. In February
2012 Apple announced it would be the first technology company to join the Fair Labour Association
(FLA) as a participating company.
Case Study : Canon 1S(A: 01917003917- 02317003917) ( B: 35217003917- 35617003917)

Canon’s profile

Canon Inc. (hereafter Canon) was founded in 1937. Its headquarters are in Japan and the company is
listed on the NYSE. Although the digital camera is the most well-known product to consumers, Canon
also produces devices for office and industry use. Canon is planning to invest more in medical image
recording equipment and ophthalmic devices.

Canon’s regional headquarters are established on every continent and, together with other
companies, they form the Canon Group. Canon has a global network of more than 200 companies and
employs more than 160,000 people worldwide. Canon Inc. alone employs more than 26,000 people. It
is dedicated to advancements in technology and commits approximately 10% of its total revenue each
year to Research & Development. Canon is consistently one of the top few companies to be granted
the most number of patents over the last 18 years. In the year 2010 Canon Group’s net sales were
estimated at $45,764 million.

Canon’s CSR policies and reporting

It seems that Canon invests a great deal of effort into its CSR reporting. It publishes a separate
sustainability report. Apart from that, a lot of information regarding its compliance with different
standards and its positive role in society (fund raising and other activities) can be found on its
webpage. The company introduced a CSR strategy based on the Kyosei philosophy in 1988. At that
time this philosophy was not yet widely used, but in recent years the philosophy has come to be
commonly used in Japan, in business, politics and in daily life. It is used to imply a range of concepts
and meanings. Canon refers to kyosei defined as ‘living and working together for the common good.

Currently, Canon has a CSR policy and a CSR mission statement. It has Canon’s Global Code of
Conduct. Canon follows the GRI Sustainability Reporting Guidelines 2006 and its CSR report is
examined by an external auditor. These external commentators are asked to use a part of the G3
Sustainability Reporting Guidelines as the basis for developing their opinions, namely four reporting
principles relating to defining the content of the report.

Canon is listed in different sustainability indexes, such as the Morningstar Socially Responsible
Investment Index (Japan) and the Ethibel Sustainability Index Global (Belgium). On Canon’s website
information is included about its attempt to reduce CO2 emissions, setting up a consultation process
with stakeholders and conducting environmentally-friendly manufacturing.

The Canon Group Environmental Charter addresses the theme of maximizing resource efficiency from
the dual approaches of environmental assurance and economic activities. It considers overall product
lifecycles and sets environmental assurance activities for the entire group. Relief activities and fund-
raising campaigns are carried out in regions affected by sudden disasters (earthquakes, heavy snowfall,
floods, typhoons, fires).

The company is also active in recycling. For example, in Singapore it recently joined other companies in
a cartridge recycling project. A ‘Cradle-to-Cradle’ philosophy was used to design the newest generation
Energy Star-compliant Canon devices which consume significantly less energy in their manufacture,
transportation and use. The result of this is a smaller total carbon footprint. These technologies have
reduced CO2 emissions by approximately 11,000,000 tons and saved consumers 350 billion Japanese
Yen in electricity costs from 2003 to 2010.
Canon’s conflicts

Stress-related illnesses When trying to analyze the company’s behaviour it was difficult to find reliable
independent articles. Nevertheless, one article from 2007 deserves attention. In Canon Denmark a
problem of stress related illnesses occurred. These illnesses were the result of changes in the
organization and increasing pressure to perform. As this caused many problems for business
managers, human resources (HR) and increased the workload for other employees, Canon Denmark
started to develop a policy to reduce stress in the workplace. While it was carrying out research for
that policy, the government of Denmark also strengthened the anti-smoking legislation and the works
council was demanding changes to a number of existing policies.

The company realized that a specific stress-reduction policy was not enough and started to examine
not only its own, but the European and global Canon policies as well.

Employees not allowed to sit down during working hours

Internet research also presented a couple of articles related to Canon Electronics Inc., a company
based in Japan, forcing its employees to stand during their work and demanding that they walk at a
specific pace. As it was not possible to find an NGO report on this topic or any other completely
reliable source, this research is based on blogs and comments by alleged employees. In Hisashi
Sakamaki’s theory (Representative Director of Canon Electronics) forcing employees to stand not only
saves money but increases productivity and enhances employee relationships. It can be called into
question whether removing chairs enhances productivity in the long run. It is fair to assume that
people feel under pressure when they are not allowed to sit down or when they are forced to walk at a
prescribed speed.

The previously mentioned Canon Denmark case clearly showed that work-related stress has a negative
effect on the whole working process and that good management focused on preventing stressful
situations is crucial. Good practices from one company should apply to the whole group. The annual
report should provide information on the way the company follows best practices in its worldwide
operations and this should well exceed legal requirements. Clear conclusions on how this case was
addressed, if addressed at all, cannot be made due to the non-ability of the author of this article to
understand the Japanese language. But at the same time it points to a lack of transparency in reporting
on this issue. An official report from the company would be appreciated as it is difficult to assess the
situation from an European point of view.

Canon’s CSR policies post-conflicts

This chapter of the article focuses on comparing Canon’s sustainability reporting on employee matters
between the years 2007 and 2010. Since its founding, Canon has promoted ‘Health First’ as one of its
Guiding Principles. Even in the Canon Inc. sustainability report of 2007 it can be read that Canon took
action in preventing lifestyle-related diseases. With the government enactment of health-promoting
policies and laws, such as Health Japan 21 and the Health Promotion Law, lifestyle checks and tests are
performed during periodic medical examinations. Based on these examination results, all Canon Group
companies in Japan have set common numerical targets with the aim of preventing lifestyle-related
diseases. Their focus was (and still is) on cholesterol and smoking rates. Canon’s experience in
managing stress, from the previously mentioned Canon Denmark case, had convinced the company to
focus on prevention, rather than the treatment of problems.
A clear shift from reactive to proactive management was made. When looking through its webpage,
this is now clearly seen. Canon also took the opportunity to develop action-based policies. In August
2007 Canon launched a new policy that covered topics such as: Work-life balance, aging workforce,
health and safety, stress management, respect and tolerance, smoking, alcohol and substance abuse,
nutrition and exercise. Some of these policies can also be measured. To ensure an appropriate work-
life balance excessive working hours were constrained through the strict implementation of a ‘no-
overtime day’.

During 2009, an average in-house ratio of 80% adherence to prescribed working hours on ‘no-overtime
days’ was achieved and the number of total overtime hours worked per employee for that year was
down by approximately 100 hours from 2008. On ‘no-overtime days’ in 2010 the same 80% average of
employees left work at the designated time as the year before. Data can be found for cholesterol and
smoking targets and performance.

From 2004 to 2006, smoking rates dropped from 33 to 30%, exceeding the goal of 31%. The target of a
10% decrease regarding high cholesterol was not achieved; the report stated that it had dropped from
11.7 to 11%. In 2010 the smoking rates dropped to 27.5% and high cholesterol to 9.2%. For the aging
workforce, Canon implemented a system for re-employing retired employees until the age of 65. In
2006, 73 of the 211 who had reached retirement age chose for re-employment, and by the end of that
year 177 were working under this system. In 2010, 139 of the 234 employees who had reached
retirement age chose for re-employment, with 451 working under this system by the end of that year.

The initial focus of the policy in 2007 was stress management for all employees. It developed a series
of seminars for employees on the topic. Concerning this issue it increased its focus on soft (i.e. non-
cash) benefits and managers’ competence coaching and leadership, it decreased the long-term
absence rates, it allowed HR to focus on strategic workforce planning and development issues, it
developed HR and management competences, and it structured the approach to deal with stress.

The sustainability report of 2011 mentions that Canon organised seminars for managers in China and
Vietnam and intercultural training seminars at operational sites in Europe. In addition, research shows
that there has been a shift from reporting on basic needs to reporting on intellectual improvement.
The Canon Europe Sustainability Report 2010-2011 shows its active encouragement for employees to
have a healthy work and life balance. But greater emphasis is given to education, development and
performance. As almost three-quarters of the employees expressed their overall satisfaction with
working for Canon,173 apparently Canon met their needs and it is time for Canon to set higher goals.

To sum up, in the case of Canon and CSR it is about meeting the legal requirements and also exceeding
the minimum CSR standards. This brief overview has focused on employee matters as problems in
other areas of CSR were not addressed in the available resources. The case study presents a change in
Canon’s CSR reporting from a reactive to an active approach. The Canon reports mainly emphasize
environmental reporting; however, that exceeds the scope of this article (as it does not mention
issues). As Canon meets CSR standards it should be encouraged to go even further as this is the area of
the law that brings prosperity to society. Canon’s development should therefore never be finished.
IKEA and Environmental Ethics 1S(A: 02417003917- 02817003917) ( B: 35817003917- 36217003917)

ABSTRACT

The case discusses the environmental ethics of the world’s largest furniture retailer, IKEA, and the
various measures the company took to make a positive impact on the environment. The Sweden-
based company took measures to ensure that the materials it used were sustainably sourced and the
labor it employed met international labor regulations. Apart from improving its operations, IKEA, in
2000, launched a suppliers’ code of conduct, the ‘IKEA Way on Purchasing Products, Materials, and
Services (IWAY)’. Under this, the suppliers were required to comply with applicable laws and
regulations related to environmental protection and thereby create a positive impact on the
environment.

Issues:

 Discuss the issues and challenges for a company on the environmental ethics front.
 Understand the significance of environmental ethics for a company like IKEA.
 Analyze the IWAY of IKEA.

Introduction

In 2013, the Tempe outlet of IKEA won the Sustainability Leadership Award for its energy and water
efficiency. The building featured a huge one-megaliter tank – installed for the purpose of irrigation,
cooling, and toilet flushing – along with other energy efficient procedures such as sensor lighting,
skylights, CFL and LED lights, and solar hot water. Analysts felt that the global furniture retail chain had
made a lot of progress on the environmental sustainability front. As of February 2014, IKEA had
renewable energy sources equivalent to any energy company. It owned 157 wind turbines and 550,000
installed solar panels, which could generate energy of 345megawatts and 90 megawatts respectively.

The iconic IKEA, founded by Ingvar Kamprad in 1943, had grown to become the world’s largest
furniture retailer. The Sweden-based company’s business concept in all its markets was to offer
furniture of simple designs at affordable prices. Though the company designed its own furniture and
other items, it manufactured only a minimal portion; most of the supplies were made through a global
network of contract manufacturers. IKEA did not have its own manufacturing facilities. Instead, it used
subcontracted manufacturers in different parts of the world for its supplies. IKEA strove hard to
project itself as an environmentally conscious, ethical company. It took measures to ensure that the
materials it used were sustainably sourced and the labor it employed met international labor
regulations. .
Conflict of Interest Case Study: Confidentiality Scenario 1

You are a sixth-year graduate student at a large university in the final months of your dissertation
research on novel photonic materials. You are worried about your next appointment, and have applied
for several postdoctoral positions in this field plus a few tenure-track assistant professorships at
universities where you would like to work. To your surprise and pleasure, you are invited for an
interview for a tenure-track appointment at your undergraduate alma mater, a prestigious research
institution in a city where you already have connections and would love to live.

In the question-and-answer period following your seminar on your research, the department chair asks
for detailed information about the novel material-preparation technique developed in your graduate
research, and used extensively in your experiments. Your group is working on a patent application and
its members have agreed not to provide details until a paper currently being prepared is submitted for
publication. Your thesis advisor will be giving the first major presentation on the technique at a major
international conference in a couple months.

You answer that you and your colleagues are in the process of writing it up for publication and a
patent application, and you would be glad to send them an early preprint when it is available. The
question and answer period continues and concludes uneventfully and pleasantly.

After the seminar, in your private interview with the Chair, he pushes harder for this information,
remarking that the Department seeks team players, willing to share information with department
colleagues, and referring to your undergraduate roots and the need to prove you are one of them to
be a viable candidate for the position.

What should you do?

Questions

• What are the interests of the various players?

• Where are the conflicts of interest?

• What are your options?

Conflict of Interest Case Study: Confidentiality Scenario 2

1S(A: 02917003917- 03317003917) ( B: 40117003917- 40517003917)

A student finishes a Ph.D. working on a problem that has aspects that are directly patentable and solve
a major problem in the disk drive industry. His new job could be with Hitachi or Seagate, or some
similar firm. He arrives at the new job and discovers that the work done as a student, which is in the
patent process, will solve the problem at his new company. If he reveals what he knows to his new
employer he will be an immediate hero, but will compromise the patent process at his original
institution. This step could have important financial implications for the original institution in the form
of royalties.

Questions

What are the relevant ethical considerations in this dilemma? The answer could depend on missing
information, such as the nature of the contract signed by the student with his institution, if any, and
the nature of its intellectual property rules. This information may have an impact on what the correct
ethical response is.
Conflict of Interest Case Study: Confidentiality Scenario 3

1S(A: 03417003917- 03817003917) ( B: 40617003917- 41317003917)

A well-known theoretician at Institution A is called by an experimentalist at Institution B to discuss

what appears to be a new discovery, based on a highly original approach to the measurements in
question. The discovery supports the theorist’s highly controversial approach to the problem. However
there is a substantial amount of work needed before the results can be submitted for publication. The
theorist has been invited to present a seminar at Institution C, where she is a candidate for a position,
and where competitors of the experimentalist at Institution B are found. She was not told explicitly
that his conversation with the experimentalist at Institution B was privileged.

Questions

• What should she do in preparing for his visit?

• What are the potential conflicts of interests?

• What ethical considerations should the theorist consider in preparing her talk?

• Are there other actions that she could or should take in preparing for the visit?
Data Acquisition Case Study: Data Handling and Record Keeping

1S(A: 03917003917- 04317003917) ( B: 41417003917- 41917003917)

You are a graduate student working in a lab where data are accumulated for the purposes of
measuring the optical absorption of a variety of samples. For each sample there is a large data file
stored on a computer in the lab. In reviewing a lab notebook from one of your predecessors in the lab
and comparing that to data published by the lab, you find a gap. That is, some of the data that were
published are not accounted for in the lab notebook. Furthermore, you are unable to locate the
computer files for this missing data. You talk to a fellow graduate student about this situation, and he
tells you that you should be very concerned about the situation and that it should be reported.

Question

What are some possible situations that could explain the “missing” data, and how should you proceed
for each?
Ethics Case Study Emotional Intelligence; conscience as sources of ethical guidance; Human
Values; Moral attitude.

1S(A: 04417003917- 04817003917) ( B: 42017003917- 42417003917)

After a year of intense training at LBSNAA , Anil has come to Mukherjee Nagar to meet his
close friend Parul who is preparing for civil services. Anil is wearing squeaky clean white shirt
and a costly pant and shoes. Instead of going to a posh hotel, out of nostalgia Anil visits a
roadside tea shop to have a cup of tea with his friend who is comfortable with it.

A 10 year old boy, who was cleaning dishes until their arrival, brings both of them two glasses
of tea on his master’s order. Anil who is on a phone call, unaware of boy standing behind him,
accidentally touches the plate carrying tea glasses. Hot tea spills all over his shirt and glasses
are broken into pieces on the ground. The owner of the shop, seeing this, beats the boy to a
pulp.

What would be your reaction as a human being and as a would be IAS officer if you were in
Anil’s place ? (250 Words)
The Cost of Integrity (1S(A: 04917003917- 05317003917) ( B: 425817003917- 43117003917)

Dr. X, a distinguished structural engineer, received a phone call from an engineering student at a
nearby college. The student expressed concern that Dr. X's famous skyscraper had a serious technical
design flaw. At first, Dr. X dismissed the student's concerns outright but the conversation gets him
thinking. Over the weekend, Dr. X sifts through his data and realizes the student is indeed correct -
strong winds could cause this famous landmark to topple and in the process kill thousands of innocent
people. Rectifying the problem would be no small task and would require notifying the building's
owners, city officials, and the press and might negatively impact Dr. X's professional reputation.

Consider each of the following questions and evaluate the case study:

1. What is the action or inaction that is the cause for concern?

2. Who or what may be affected?

3. How will they be affected? (i.e., what are the possible consequences?)

4. Are there any laws, regulations written or unwritten that may apply?

5. What actions might be taken and what would the consequences of these actions be?

6. Can anything be done to prevent this from reoccurring or to minimize the severity of the
consequences?
"Borrowing" Without Permission

1S(A: 05417003917- 05817003917) 2S ( A: 00121303917- 00521303917)

Lisa, a postdoctoral student in Prof. X's lab is told that she will not be re-appointed when her current 1-
year contract expires. Lisa feels that Prof. X has the funds to support her but that he simply doesn't like
her and that is why he is not reappointing her. Angry with Prof. X and determined to get back at him,
Lisa decides that she will take her lab notebooks, some lab supplies, and several critical laboratory
reagents when she leaves. Lisa is surprised a month later when armed policemen show up at her
parents' home to arrest her...

Consider each of the following questions and evaluate the case study:

1. What is the action or inaction that is the cause for concern?

2. Who or what may be affected?

3. How will they be affected? (i.e., what are the possible consequences?)

4. Are there any laws, regulations written or unwritten that may apply?

5. What actions might be taken and what would the consequences of these actions be?

6. Can anything be done to prevent this from reoccurring or to minimize the severity of the
consequences?
Case Study Dealing with staff performance issues
Outline of the case
2S ( A: 00621303917- 01021303917)

A junior member of staff has just returned to work after taking special leave to care for her elderly
mother. For financial reasons she needs to work full-time. She has been having difficulties with her
mother’s home care arrangements, causing her to miss a number of team meetings (which usually
take place at the beginning of each day) and to leave work early. She is very competent in her work but
her absences are putting pressure on her and her overworked colleagues. You are her manager, and
you are aware that the flow of work through the practice is coming under pressure. One of her male
colleagues is beginning to make comments such as “a woman’s place is in the home”, and is
undermining her at every opportunity, putting her under even greater stress.

Key fundamental principles

Integrity: You need to be fair to all those involved and act in a straightforward manner. Confidentiality:
You owe a duty of confidentiality to the staff involved. Professional behaviour: How should you
proceed so as not to discredit yourself, your profession or the practice for which you work?

Considerations
Identify relevant facts:

Consider the firm’s policies, procedures and guidelines, best practice and, with legal assistance if
required, applicable laws and regulations. Is there a staff handbook or similar internal publication?
Consider whether it is your proper role to manage this sort of staff issue. Does the practice have a
department responsible for personnel issues?

Identify affected parties:

Key affected parties are you, the junior member of staff and her colleagues. Other affected members
of staff may be in the personnel department.

Who should be involved in the resolution:

Consider not just whom you should involve but also why and when. Can your professional body
provide advice and guidance? Do you have access to appropriate staff in the personnel department, or
are you able to consult an external organisation for confidential advice?

Possible course of action

Check the relevant facts. If necessary, clarify staff procedures with the personnel department. Take
legal advice if required.

Discuss the matter with the junior member of staff. Possible solutions may include suggesting a more
flexible approach to team meetings. Do these always have to be in the morning? At times, working
from home may be an option for the junior member of staff. You also need to deal with the other
member of staff, who needs to be reminded about proper conduct and how such behaviour may
amount to harassment and be in breach of the practice’s code of conduct.

Considering the issues and trying to identify a solution enables you to demonstrate that you are
behaving professionally and attempting to resolve the difficulties faced by the junior member of staff.
Throughout, you must be seen to be acting fairly – both towards the junior member of staff, who is
responsible for her mother’s care, and towards other members of staff.

Having considered all reasonable compromises, if the conclusion is reached that the junior employee is
unable to carry out the work for which she was employed, you must turn your attention to her on-
going employment within the practice. This will probably be out of your hands, and you should deliver
the relevant facts to the personnel department or the owners of the practice. Appropriate
confidentiality must be maintained at all times. You should document, in detail, the steps that you take
in resolving your dilemma, in case your ethical judgement is challenged in the future.
Case Study Improper accounting for sales
Outline of the case
2S ( A: 01121303917- 01521303917)
You are one of three partners in a firm of accountants. Five years ago the firm was appointed as
external accountants to a young, successful and fast-growing company, engaged to prepare year end
accounts and tax returns. The business had started trading with a handful of employees but now has a
workforce of 200, while still remaining below the size of company requiring a statutory audit.

Due to your close relationship with the directors of the company (who are its owners) and several of
its staff, you become aware that staff purchases of goods manufactured by the company are
authorised by production managers, and then processed outside the accounting system. The proceeds
from these sales are used to fund the firm’s Christmas party.

Key fundamental principles

Integrity: Would omitting income from staff sales result in the financial statements and returns to the
tax authority being misleading? Is the practice dishonest, and what should be your involvement?

Objectivity: In view of the trust that has built up between you and your client, and the threat brought
about by the familiarity you have with the directors and staff of the company, how will you maintain
your objectivity when deciding on a course of action?

Professional competence and due care: You must ensure that the financial information that you
produce on behalf of your client is in accordance with technical and professional standards.

Professional behaviour: How should you act in order to protect your reputation and that of your firm
and your profession?

Considerations
Identify relevant facts:
Consider relevant accounting standards and any applicable laws and regulations. Determine the
system currently employed for controlling staff sales and funding the staff Christmas party.

Identify affected parties:

Key affected parties are you and your firm, your client company, its directors and staff, and users of
the company’s accounts, including the tax authority.

Who should be involved in the resolution:

The reputation of your firm may be vulnerable, and you should disclose this ethical dilemma to your
partners. Throughout the resolution process, you should keep your partners informed and be alert to
any possible requirement to notify your professional indemnity insurers. It is not appropriate to
discuss the matter with any of the staff of the client company, although the directors should be
informed of the issue as soon as possible, and be involved in the resolution.

Possible course of action

Having brought the issue to the attention of your partners, and obtained the relevant details of the
client’s system for accounting for staff sales, you should raise your concerns with the directors of the
client company.
Case Study : Conflicting clients’ interests
Outline of the case
2S ( A: 01621303917- 02121303917)
You are a sole practitioner who used to provide a range of accountancy services for a small company
(Company A) that owns a hardware shop in the town where you practise. Following a brief retendering
process, the client chose to engage an alternative firm of accountants. Both you and the other firm had
been asked to tender for a range of services, including the preparation of year end accounts, tax
compliance work, and a due diligence exercise in respect of the intended purchase of a small hardware
business in the neighbouring town. You believe that you were unsuccessful in the tendering process on
the basis of cost alone, as Company A is not very profitable, and suffers from the competition of the
other hardware business that it intends to acquire.

You are the continuity provider for another local sole practitioner. Two months ago he suffered a heart
attack, and so you are currently acting for a number of his clients. He is not expected to resume
practising for another two months. One of the clients of the incapacitated practitioner (Company B)
operates a shop selling electrical goods. The director and majority shareholder has called you to
arrange a meeting to discuss a business venture that he is considering.

At the meeting, the client explains that he intends to make an offer for the same small hardware
business that Company A is seeking to acquire. He is aware that there is another bidder for the
business, but is unaware that it is Company A, or that Company A used to be your client. When the
meeting is over, you start to feel uneasy. You want to help Company B and provide a valued service on
behalf of the practitioner for whom you are the continuity provider. But you realise that you are also in
possession of confidential information concerning the plans of your previous client. You are aware of
Company A’s problems and its motivation for wishing to acquire the business.

Key fundamental principles

Integrity: You must be straightforward and honest.
Confidentiality: How will you ensure that you do not use confidential information relating to your
previous client to the advantage of Company B?

Professional behaviour: How will you safeguard your reputation and that of your profession?

Considerations
Identify relevant facts:
You have responsibilities to the practitioner for whom you are the continuity provider, and to his
clients. You may assume that the target business has a premium value to Company A, because
Company A already owns a similar business. However, this is confidential information (which would
give Company B a competitive advantage in the bidding process).
You must not breach the fundamental principle of confidentiality. In addition to your professional
body’s code of ethics, you should consider any applicable laws and regulations. Identify affected
parties:

Key affected parties are you, Company B (and its director), Company A (and its directors) and the
target business (and its owners). You should also consider the practitioner for whom you are acting as
continuity provider.

Who should be involved in the resolution:

The issue of confidentiality is a sensitive one, and you should not involve any parties in the resolution
process without good reason. Any discussion of this ethical dilemma, in itself, risks breaching
confidentiality. The involvement of your professional body may be particularly useful in such a
situation. If the other sole practitioner is well enough, he should be informed of the dilemma and the
actions that you decide to take.
Possible course of action
You must not disclose to the director of Company B any confidential information gained from your
former relationship with Company A. Nor may you use the information for the advantage of Company
B or for your own personal benefit.

Your problem is complicated by the fact that you are obliged to act for certain clients under the
continuity agreement. However, you must remove (or reduce to an acceptable level) the threat to the
fundamental principle of confidentiality. This may be achieved by openly declaring the conflict to the
director of Company B. Even so, you must exercise very careful judgement when determining how
much information can or cannot be shared.

In the first instance, you should evaluate the threat to the principle of confidentiality brought about by
the conflicting interests of your current client and your previous client. In this case, you are likely to
conclude that it is significant. Even if you believe that the threat can be managed while you assist
Company B in its bid for the target business, this may not be the perception of a reasonable and
informed third party. Therefore, you should consider declaring the conflict of interest between
Company A and Company B, and explaining that you cannot act on behalf of Company B in respect of
the proposed bid for the target business. You still have a responsibility to your previous client, but if
you need to disclose this fact to the director of Company B, you should not mention the name of that
client. Such disclosure should be documented.

If pressure is put upon you to disclose the name of the other bidder, you should resist. Under such
circumstances, it may be advisable to disengage from the client completely in order to effectively
safeguard the threat to confidentiality. This will be a measure of last resort, as you are expected to
provide continuity of service to Company B, and also act in the interests of the practitioner who is
incapacitated. You should keep the incapacitated practitioner informed, if possible. In any event, you
should document, in detail, the steps that you take in resolving your dilemma, in case your ethical
judgement is challenged in the future.
Case Study How much to disclose to the finance director
Outline of the case
2S ( A: 02221303917- 02621303917)
You are a qualified accountant in practice, and you lead a team providing management consultancy
services. In recent years your practice has undertaken several assignments on manufacturing efficiency
improvements for a medium-sized, quoted group of companies. It operates through a number of
divisions, but line responsibility appears complicated, and so significant control rests with four semi-
autonomous regional directors. The authority of these directors is enhanced by their seats on the
group’s main board.

You have cultivated a good working relationship with the regional director with whom you are in
contact most frequently. Three weeks ago that regional director asked you to investigate, as a matter
of urgency, a particular project, Project A. He had been irritated to be told, informally, of the likely
deferral of the agreed delivery date for the components on this sophisticated design-and-build
contract. Project A comes within the regional director’s responsibility primarily because of the location
of the factory that makes the key components.

Once on site, your team had discovered a range of difficulties with the project, starting with
fundamental design faults and extending deep into the manufacturing processes. It is clear that
various contracts will be breached, and litigation is likely to follow. Your team has produced a
prioritised list of actions and begun working to establish a revised schedule to take the project to
completion.

At a recent meeting, you gave the regional director and the factory manager your estimate that the
delay to Project A will be a minimum of three months. You indicated that extra direct costs are likely to
be £7 million to £10 million. This is before any potential claims for compensation.

On the instructions of the regional director, your team has been working on a formal report specifying
detailed recommendations. While still incomplete, the report appears certain to support your previous
estimates. You are aware, from the financial press, that the group is rumoured to have difficulties with
its bankers. You assume that the situation with Project A is likely to be seriously detrimental to the
group’s financial position.

One week before the final version of the report is due, you receive a surprise telephone call from the
group’s finance director. He explains that he is about to enter a main board meeting, but needs to
know a date for delivery of the report on Project A. Late the previous evening, the regional director
had informed the finance director that your firm had been asked to provide the report.

He says:
“I appreciate that you have only just started, so there are no reliable estimates yet. But the regional
director mentioned that Project A could incur around £4 million to £5 million in extra costs, with
income delayed by perhaps six to eight weeks. The regional director has sent his apologies to the
board meeting, as he has to attend a family funeral.”

He adds:
“Hopefully, the regional director is being cautious, but if something does turn out to be as wrong with
Project A as those numbers suggest, the extra costs and deferred income have serious implications for
the group’s cash flow. The full board will need to start planning remedial action now. When will your
report be ready?”
Key fundamental principles
Integrity: How do you maintain your professional integrity: by responding only to the question asked
or by immediately alerting the finance director and the main board to the seriousness of the situation?
Objectivity: Does loyalty to the regional director, from whom your firm usually takes instructions,
outweigh your responsibility to the main board? If not, can you resist any feeling of intimidation from
the regional director that you may be experiencing?

Confidentiality: Confidentiality is fundamental to the assignment as a whole. But to whom is the duty
of confidentiality owed?

Professional behaviour: The information you have could assist the main board significantly with the
discharge of its duties. Whether you disclose the information now or restrict the information you
provide pending a discussion with the regional director, how can you protect your reputation and that
of your firm?

Considerations
Identify relevant facts:
You should establish why the finance director appears to have incorrect information. Is there a mistake
or misunderstanding, or some other explanation for the discrepancies in the extra costs and the time
frame? You must establish from your engagement letter to whom you owe a duty of confidentiality, in
order to resolve your potential conflict of loyalty.

Identify affected parties:

Key affected parties are you, the regional director, the finance director and the board. Indirectly,
investors and other stakeholders in the group are affected, due to the group’s recent cash flow
problems.

Who should be involved in the resolution:

You should involve the regional manager as early as possible, and the finance director and the main
board if necessary.

Possible course of action

You should take care not to make a hasty decision while on the telephone to the finance director. If
necessary, you should state when your report will be ready, and end the telephone conversation, so
that you may establish the facts. It should be possible to call the finance director back later, even if
that means interrupting the board meeting.

As soon as you are able, you should review the firm’s letter of engagement, which will establish who
the client is for the purpose of your duty of confidentiality. Your firm is engaged as consultants, rather
than as auditors, and if your engagement is with the division overseen by the regional director, it could
be argued that communication to the main board is an internal matter for which you have no direct
responsibility.

In the meantime, you should attempt to contact the regional director to inform him of the finance
director’s misunderstanding, and reconcile the conflicting estimates. You should not take part in any
deliberate attempt to mislead the main board.

It is possible that the future of the group as a going concern could be under threat. If a review of the
engagement letter reveals that your engagement is with the main board, in the absence of an
explanation from the regional director, you should call the finance
director and explain that the report is likely to reveal estimates that are very different from those
mentioned earlier.

If the engagement is with the regional director’s group company, a duty of confidentiality is owed to
that client and, if the finance director seeks further information from you, you should make your
position clear. Nevertheless, when you are able to contact the regional director, you should discuss
with him the call you received from the finance director. If you are then of the opinion that the
regional director has deliberately misled the main board, you should ask him to rectify the position.
If he does not, you might have a conflict of interest. You could seek advice from your professional
body. In addition, in order to determine your responsibilities (and those of the regional director
towards the main board), you may seek independent legal advice.

You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical
judgement is challenged in the future.
Case Study : Placing unreasonable expectations on a student
Outline of the case
2S ( A: 02721303917- 03121303917)
You are a trainee accountant in your second year of training within a small practice. A more senior
trainee has been on sick leave, and you are due to go on study leave. You have been told by your
manager that, before you go on leave, you must complete some complicated reconciliation work. The
deadline suggested appears unrealistic, given the complexity of the work.

You feel that you are not sufficiently experienced to complete the work alone. You would need
additional supervision to complete it to the required standard, and your manager appears unable to
offer the necessary support. If you try to complete the work within the proposed timeframe but fail to
meet the expected quality, you could face repercussions on your return from study leave. You feel
slightly intimidated by your manager, and also feel pressure to do what you can for the practice in
what are challenging times.

Key fundamental principles affected

Integrity: Can you be open and honest about the situation? Would it be right to attempt to complete
work that is technically beyond your abilities, without proper supervision? Professional competence
and due care: Is it possible to complete the work within the time available and still act diligently to
achieve the required quality of output?

Professional behaviour: Can you refuse to perform the work without damaging your reputation within
the practice? Alternatively, could the reputation of the practice suffer if you attempt to perform the
work?

Considerations
Identify relevant facts:

The practice that employs you is small and under pressure due to the sickness of a member of staff.
However, the work you are being asked to perform is beyond the usual ability of a trainee at your
level. Determine whether the deadline can be extended; when your colleague is expected to return
from sick leave; and what other resources might be available to the practice. Consider the policies and
procedures of the practice, as well as your professional body’s code of ethics.

Identify affected parties:

Key affected parties are you, your manager, the practice, its other employees and the client. Who
should be involved in the resolution: In the first instance, you should attempt to resolve the issue with
your manager, although it may be necessary to involve the person responsible for training within the
practice. You might, at an appropriate stage, suggest that the client be involved.

Possible course of action

You should explain to your manager that you do not have sufficient time and experience to complete
the work to a satisfactory standard. However, you should demonstrate a constructive attitude, and
suggest how the problem may be resolved. (Your professional body is available to advise you in this
respect.) For example, you might suggest the use of a subcontract bookkeeper, or contacting the client
to enquire if the deadline might be extended so that the work may be performed when you return
from study leave or when your colleague returns from sick leave. You might also explore the possibility
of assigning another member of staff to supervise your work.

If you feel that your manager is being unsympathetic or simply fails to understand the issue, you
should consider how best to raise the matter with the person within the practice responsible for
training. It would be diplomatic to suggest to your manager that you raise the matter together, and
present your respective views. This would have the added advantage of involving a third party.
It would be unethical to attempt to complete the work if you doubt your competence. However,
simply refusing to, or resigning from your employment, would cause significant problems for both you
and the practice. You could consult your professional body. If you seek advice from outside the
practice (for example legal advice), you should be mindful of the need for confidentiality as
appropriate. You should document, in detail, the steps that you take in resolving your dilemma, in case
your ethical judgement is challenged in the future.
Case Study : Financial interest
Outline of the case

You are a partner in a three-partner firm of accountants. The firm generates fees of approximately
£1.4 million per annum. Within your portfolio of clients is Company A, which has been very successful
since it first came to your firm five years ago. It now has an annual turnover in excess of £15 million.

Company A generates annually recurring fees for the practice of approximately £50,000, of which
approximately £35,000 is in respect of audit work and £15,000 relates to routine tax calculations and
preparation of the corporation tax return. Your firm has a separate tax department, which performs
the tax compliance work in respect of Company A.

The company’s financial year end is December. Last year the audit work commenced in June, and the
audit report was finally signed in August. By the end of August, the tax return had been submitted to
the taxation authority, and the firm’s invoice had been issued to Company A.

In September a significant customer of Company A went into receivership, and Company A suffered a
large bad debt. The directors approached you immediately, and were very open about the company’s
short-term cash flow problem. Therefore, you agreed that payment of the firm’s invoice of £50,000
could be spread over ten months, commencing in October.

Company A also needs the support of its bank and, in December, it was negotiating a modest increase
in its overdraft facility. It is now early March, and the bank has requested audited financial statements
by the end of the month. The audit is well underway, and you have promised the directors of Company
A that the bank will have the audited accounts on time.

The planning of the audit was performed by the audit senior and reviewed by the audit manager for
the assignment (in whom you have a great deal of confidence). Due to pressure of work, you did not
review the audit plan in detail before the audit team commenced the year end audit work, and so you
decide to review and sign off that section of the audit file now.

You note that the audit manager has correctly identified going concern as the area of the audit
attracting greatest risk. However, at the time of planning the audit, the manager was unaware of the
credit agreement reached with regard to the payment of last year’s fees. You check your firm’s
records, and determine that Company A still owes the firm £25,000.

Key fundamental principles

Integrity: There was a flaw in the planning of the audit, which was not noticed by the audit manager
before the audit work commenced. Is it possible to ignore the flaw and yet act with integrity, given
that the flaw was unintentional?

Objectivity: Can you reach an objective audit conclusion in view of your wish for Company A to
continue trading and settle its outstanding fees to your firm?

Professional competence: You need to bear in mind any ethical standards for auditors relevant to the
country in which you practice.

Professional behaviour: Regardless of the actual impact of the outstanding debt on your objectivity, if
the bank (or a hypothetical, objective, well-informed third party) knew of the outstanding fees, what
impact would it have on your firm’s reputation?

Considerations
Identify relevant facts:
Through a combination of circumstances, your firm is under pressure to complete an audit assignment
while it has a financial interest in the client. The debt of Company A to your firm was not as a result of
an investment decision, but a pragmatic solution to a problem being faced by an honest client.
Nevertheless, your firm has a clear interest in the client’s ongoing existence, and would not want the
audit opinion to jeopardise the repayment of the debt. Identify affected parties:

Potentially, the affected parties are you and your firm, Company A, the bank, and any stakeholders in
Company A who will refer to your firm’s audit opinion.

Who should be involved in the resolution:

You may involve the audit manager in discussions, although he can do nothing to make your opinion
more objective. He can only provide advice (as can your professional body). You should certainly
involve your partners, and consider who else you may involve who is free from any personal interest in
Company A.

Possible course of action

You need to ensure that the audit opinion is reached objectively, but also that a reasonable and
informed third party would conclude that objectivity has been adequately safeguarded. Any discussion
with the audit manager and the audit senior, who performed the planning initially, should have the
objective of amending the firm’s planning procedures to ensure that outstanding fees are always
considered in the future.

The bank will probably have reviewed Company A’s debtors and creditors at various times, and may, at
any time, question how your firm could retain objectivity. You may wish to preempt such a question by
disclosing to the bank (with the consent of your client) the safeguards you have put in place. In any
event, you should discuss those safeguards with the directors of Company A, as there will be costs
associated with the safeguards, and it would appear reasonable to pass these costs on to the client.

The appropriate safeguards will depend on the significance of the threat presented by the outstanding
fees of £25,000. This will depend on many factors, including the personal circumstances of you and
your partners. In the context of the firm, the debt of £25,000 represents less than 2% of the firm’s
annual income. However, the annual fee income from the client (£50,000) equates to 3.6% of the
firm’s income and, when the invoice is raised for the current audit, the outstanding debt will be
significant.

You must minimise the threat to objectivity brought about by the firm’s interest in Company A
continuing to trade. A possible solution may be to obtain directors’ guarantees in respect of the
outstanding fees and the invoice which is soon to be raised. Provided the directors are in a position to
provide such guarantees, this would have a commercial benefit as well as an ethical one. It will almost
certainly be necessary to obtain legal advice before entering into such an agreement.

However, even if this possible course of action is pursued, it may not be sufficient to reduce the threat
to objectivity to an insignificant level. This may only be achieved by introducing an independent
auditor to review your firm’s audit work before the audit report is signed. This should be someone
who is independent of the firm and, therefore, unsympathetic to the firm’s interests. It may be
advisable to engage a consultancy company to perform the review, and to discuss with your client how
the additional costs will be met. You should keep your partners informed of the issue, and the
safeguards you intend to implement, throughout the resolution process.

You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical
judgement is challenged in the future.