Essay on Ethics
In modern business world, the role of ethics and ethical behavior is increasing: ethical choices improve the reputation of the company, reduce the possibilities of compliance issues and benefit the overall well-being of the company. In 2007 the U.S. Senate Finance Committee decided to pay more attention to nonprofit activities because of many documented incidents of fiscal mismanagement and unethical behavior in this sector (Smith & Richmond, 2007). Any unethical behaviors, especially in the finance sector, might significantly damage organizational reputation and hinder the implementation of the nonprofit mission.
For nonprofit organizations, the presence of ethical background for decision-making is especially important, as the very existence of nonprofits is determined by their mission. Thus, nonprofit organizations should adhere to transparency in finance and accounting, and should be able to show to the public how they are accomplishing their mission.
The purpose of this paper is to analyze ethical problem which emerged at Peart Services, the nonprofit working to alleviate poverty, during last quarter due to illegal use of funds coming from a restricted donation. These funds were used to pay administrative expenses, and the financial manager who discovered this issue is facing an ethical dilemma. The financial manager of the nonprofit organization is responsible for investments, budgets and financial reports of the organization as well as for implementing optimal use of finance in order to fulfill organizational mission.
Thus, there emerged a following dilemma. On one hand, donor funds might be critical for the nonprofit during the last quarter, and this payment could have improved organizational liquidity and contribute to more successful implementation of organizational mission in future. From this point of view, it is reasonable to hide the fact of such spending. On the other hand, the donor posed specific limitations on the use of the donation, and he or she has the right to check what the funds were used for. In this case, accountability and reputation of Peart Services will be significantly damaged. Moreover, audit committee will review the statements and might raise accountability issues with regard to the use of funds. Nonprofits also have ethical obligations with regard to their donors (Zietlow, Hankin & Seidner, 2007), and from this point of view, the manager should report this issue to the CFO and take steps in order to prevent such issues in future. The manager should adhere to the second point of view, because it complies with common ethics adopted by nonprofits, and will be more beneficial in the long-term period. In addition to this, the latter approach is more ethical basing on the principle of the common good.
Among the key financial and accounting issues which are considered essential for accomplishing nonprofit goals and mission, it is possible to name cost saving tactics, analysis of financial statements, cost-volume-profit analysis, budgeting techniques, capital budgeting, legal liabilities of board members, cash management, assessment of the adequacy of internal control, acquiring gifts of present interests, stocks and real estate, and the responsibilities of the finance committee (Moncada, 2005). In the case of Peart Services, special attention should be paid to adequacy of internal controls, cash management and responsibilities of the finance committee.
The dilemma can be addressed in the following ways. The financial manager should report the problem to the CFO and to the member of the financial committee. They can decide to recall the payment and direct the funds to buying food for the soup kitchen program, or to redirect the company’s funds planned for administrative expenses in order to replace the spent funds. If the company does not have enough current assets to cover the spending, they might either request a loan to provide for the program expenses, or contact the donor and explain the situation, if other methods of solving this issue are unavailable for the organization at the moment. The financial manager, CFO, financial committee and, most likely, audit committee should take steps against such situations in future.
Possible causes of the problem include reduced controls due to high level of trust in the organization, large degrees of control available to one person, lack of individuals with financial expertise in the board, existence of nonreciprocal transactions and lack of adequate financial management (Zietlow, Hankin & Seidner, 2007). In order to prevent this ethical dilemma in future, Peart Services needs to introduce the system of daily checks and balancing for each department, perform monthly and quarterly audits to ensure that the funds are used for their specified purposes, and to establish a review schedule within the organization. Moreover, it is necessary to check the adequacy of internal controls, e.g. whether the roles and responsibilities are organized so that no one person could have control on more than one function. Written financial policies and procedures should be reviewed with regard to their adequacy, availability and coherence. Ethics and compliance program of Peart Services should also be reviewed (or created, if there is no such program).
Furthermore, the presence of an ethical dilemma might indicate that there are issues with corporate culture. It is recommended for Peart Services to voluntarily adopt the guidelines of Sarbanes-Oxley Act. Also, according to the research of Geer, Maher and Cole (2008), the level of nonprofit accountability is closely related to the level of organizational commitment to operating standards, and to the level of transformational leadership (Geer, Maher & Cole, 2008). It was found that transformational leadership was a stronger predictor of accountability. Thus, in the long-term perspective it might be useful for the organization to focus on developing transformation leadership.
The role of ethics for nonprofit organizational is crucial. Problems with ethics and accountability can significantly damage the reputation of the nonprofit organization and affect its fundraising ability, regardless of the effectiveness of all other nonprofit structures. Financial managers have to pay utmost attention to financial ethics and transparency, because these factors have a direct impact on accountability, which, in its turn, is closely related with organizational effectiveness and accomplishment of mission. Ethics code, structure of accountability, well-balanced organizational structure and effective policies should be present in order to maintain ethical standards of behavior within the organization.
