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CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter presents an overview of the existing literature based on other writers’ opinions, findings, and viewpoints on the influence of ethics on the financial management.
2.1 Over view of key concepts in the study
2.1.1 Level of ethics
According to Johnson, et al., (2008) it is imperative for an organization to invest is building core competencies of employees son as to enhance a specific ethical standard in an organization this will enable employees to develop their skills and be in position to achieve better economic success, they define core competencies as the skills and capabilities by which resources are deployed through an organization’s activities and processes in order to achieve Competitive advantage in ways that others cannot imitate or obtain.
Most of the organizations were the core competencies of the employees is low there is an inability to acquire the skills and knowledge needed to develop the organization, a company’s strategy will be successful in creating competitive advantage when it deploys its resources and capabilities to match the key success factors within the industry environment (Sadler, 2010), that argues that no skill or cognitive trait, no matter how refined, should be described as a ‘competence’ if it does not lead a firm; directly or indirectly, to a persistent competitive advantage by satisfying a customer need better than competitors in a marketplace.
According to Ogbonna (2010) the competence of employees is essential in achieving the ethical code of conduct; this is because competence enables employee to perform according to the expectations of the management and follow the organizational rules and objectives, this helps in reduction of costs and maintaining a strong organizational influence.
According to Prahalad & Hamel (2015) view competence as the ‘root’ of competitiveness, we see it as the root of competitive advantage, i.e. the basis of persistent above-average returns, not just the ability to compete well. When the organizational employees are competent towards the performance of a given organizational task there is likely hood of growth and development in the path of organizational development. The competence of employees is essential in reduction of organizational unnecessary expenses, when the employees are not competent enough this leads to poor performance in the production process of the organization and the reduction of key organizational challenges that are experienced in the process.
According to Sanchez, (2004) the level of employee competence is essential in ensuring that organizations are able to achieve maximum returns on investments. In a study carried out in South Africa, the study showed that most of the large organization invested more in improving their employee competence to enable them reduce costs and maintain organizational profitability. Each form of flexibility is in turn distinguished by the kinds of strategic options it creates for an organization. Key interrelationships among the five competence modes are identified, and important aspects of managing each of the competence modes and their interrelationships are discussed.
Perera et al, (2016) states that a formal code of ethics ensures that professional members will be more aware of the moral aspects of their work; an accessible reference tool for managers to keep ethical concerns in mind; abstract ideas will be translated into concrete terms applicable to every situation; members as a whole will act in a more standardized fashion throughout the profession.
According to Jenfa (2010),professional ethics provides accountants with these advantages: it helps the accountant to determine the prosperity of his conduct in his professional relationship; it indicates the kind of professional posture the accountant must maintain if he is to succeed; it gives clients and potential clients a basis for feeling confident that the professional sincerely desires to serve them well and places service above financial reward; it gives clients assurance that standards of competence, independence and integrity shall remain the goal of the accountant; it enables member bodies and regulatory authorities to fulfill their responsibility of ensuring that the professional accountants have the capabilities and competence expected of them by employees, clients and the public and public interest is protected and the credibility of the profession is enhanced.
Ethics are the moral principles that an individual uses in governing his or her behaviour. It is the personal criteria by which an individual distinguishes “right or wrong” (Appah, 2011). According to Ogbonna (2010), when wetalk about ethics and ethical values, we mean our concern about things, which we think, say and/or practice that may not necessarily violate the rules of the organization or infringe the law of the land or amount to outright crime or felony, but which borders on our sense of morality, our sense of right and wrong. They concern issues like conflict of interest, insider’s dealings, compromising integrity, objectivity, independence, confidentiality, disclosure of official secret and destruction of official documents for financial benefits and other similar acts that are against moral principles and ethical standards.
Ethical codes in accounting is a practice which includes the offering, giving, receiving, or soliciting of anything of value to influence the action of a public official in the (Lysons, 2010).Nwagboso (2008) argues that ethics or morality as matters of good and evil, right and wrong and subscribes to the fact that “we are living today in an ethical wilderness”. Nwagboso believes that ethics is in ferment and chaos among all people.
2.2 Financial management
According to (Baldassare 2000), financial management in an organization requires employees trust and this is shown when an employee accomplishes organizational goals, job satisfaction, and motivation. Because financial management is sometimes viewed to have a close relationship with national growth or economic prosperity, it is considered social capital which enables members of society to confide in each other and form new groups and gatherings (Fukuyama, 1995).
In addition, more and more researchers have proven that financial management in government improves the level of public policy acceptance and reduces administrative costs, while encouraging compliance with laws and regulations (Ayres and Braithwaite, 1992; Levi, 1998; Tyler, 1998). Thus, increasing trust in government is becoming an important goal in order for central and local governments to implement their policy measures effectively and so to realize good governance. Possible causes of decreased confidence in government include government waste and inefficiency, economic change (Bok, 1997), perceptions of performance of government programs (Orren, 1997), decreasing social capital (Mansbridge, 1997), party polarization (King, 1997), lack of reflecting citizen‘s desire toward democratic values into political institution and by political leaders (McAllister 1999), and corruption like the Watergate scandal (Thomas 1998).
According to Tyler (1998) most governments in Africa are pursuing a Participatory government and have set principle and financial management as a top priority in its governing philosophy, and have initiated an intensive reform of the powerful organizations to sever collusive ties among politicians and businesses and transformed the organizations into service-oriented ones. Along with those measures, the administration has enforced several innovation initiatives for more participatory and transparent government in which participation is encouraged from both citizen and public workers, and high integrity of government is retained and all public information freely accessed.
The values of integrity, transparency and accountability in public administrations have enjoyed resurgence within the past three decades or so these key factors leads to efficient financial management in an organization. Sound public administration involves public trust, citizens expect public servants to serve the public interest with fairness and to manage public resources properly on a daily basis. Fair and reliable public services and predictable decision-making inspire public trust and create a level playing field for businesses, thus contributing to well-functioning markets and economic growth (Elia, 2005).
According to Elia (2005) accountability is achieved in an organization when there is efficient financial management in an organization, accountability refers to the obligation on the part of public officials to report on the usage of public resources and answerability for failing to meet stated performance objectives. In leadership roles, accountability is the acknowledgment and assumption of responsibility for actions, products, decisions, and policies including the administration, governance, and implementation within the scope of the role or employment position and encompassing the obligation to report, explain and be answerable for resulting consequences.
According to (Derek, 2000) in a study carried out in west Germany companies financial management is essential in enabling employees be in position to develop long term relationship with their suppliers and hence there is ability of an organization in achieving success in its endeavours. Integrity, this is the quality of being honest and having strong moral principles. It implies not merely honest but fair dealing and truthfulness. This principle of integrity imposes an obligation on all accountants to be straight forward and honest in professional and business relationships.
According to Thacker, (2006), to enhance ethical competencies of employees need to be trust worthy, in a study carried out in Japanese automobile companies. Financial management in the organization eliminates conflict of interest, a conflict of interest occurs when an individual or organization has an interest that might compromise their actions. The presence of a conflict of interest is independent from the execution of impropriety. More generally, conflict of interests can be defined as any situation in which an individual or corporation (either private or governmental) is in a position to exploit a professional or official capacity in some way for their personal or corporate benefit. Depending upon the law or rules related to a particular organization, the existence of a conflict of interest may not, in and of itself, be evidence of wrongdoing. In fact, for many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. A conflict of interests can, however, become a legal matter for example when an individual tries (and/or succeeds in) influencing the outcome of a decision, for personal benefit (McDonald, 2006).
Winkler (2002) emphasizes that through effective financial management in the organization it is able to achieve transparency among the organizational employees leading to better financial management, He argues that more information divulged by a Ministry does not necessarily imply a greater understanding on the part of the public, part of his definition of transparency. Further, he argues, the simplistic modeling of transparency as simply the reduction or elimination of the uncertainty around a parameter in a model is not helpful for a ministry trying to communicate with the public. An important lesson, however, is that transparency is about effective communication, not simply announcements.
Financial management encourages objectivity in the organization; the principle of objectivity imposes the obligation on all professional accountants to be fair, intellectually honest and free from conflicts. This principle requires four basic needs of credibility, professionalism, quality of service and confidence, (Reena et al, 2009).
Professional competence is one of the key measurements of ethical code of conduct in an organization. professional services implies that he is competent to perform the services. Accountants should refrain from agreeing to perform professional services which they are not competent to carry out unless competent advice and assistance are obtained, Posti (2005).
Financial management enhances an organization to eliminate conflict of interest, a conflict of interest occurs when an individual or organization has an interest that might compromise their actions. The presence of a conflict of interest is independent from the execution of impropriety (Thacker, 2006). More generally, conflict of interests can be defined as any situation in which an individual or corporation (either private or governmental) is in a position to exploit a professional or official capacity in some way for their personal or corporate benefit.
Depending upon the law or rules related to a particular organization, the existence of a conflict of interest may not, in and of itself, be evidence of wrongdoing. In fact, for many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. A conflict of interests can, however, become a legal matter for example when an individual tries (and/or succeeds in) influencing the outcome of a decision, for personal benefit (McDonald, 2006).
Interpretations of Rules of Conduct consist of interpretations which have been adopted, after exposure to state societies, state boards, practice units and other interested parties, by the professional ethics division’s executive committee to provide guidelines as to the scope and application of the Rules but are not intended to limit such scope or application. A member who departs from such guidelines shall have the burden of justifying such departure in any disciplinary hearing. Interpretations which existed before the adoption of the Code of Professional Conduct on January 12, 1988, will remain in effect until further action is deemed necessary by the appropriate senior technical committee.
Ethics Rulings consist of formal rulings made by the professional ethics division’s executive committee after exposure to state societies, state boards, practice units and other interested parties. These rulings summarize the application of Rules of Conduct and Interpretations to a particular set of factual circumstances. Members who depart from such rulings in similar circumstances will be requested to justify such departures. Ethics Rulings which existed before the adoption of the Code of Professional Conduct on January 12, 1988, will remain in effect until further action is deemed necessary by the appropriate senior technical committee.
As a quality of financial report is referred to as the capability of making a difference in the decisions made by users in their capacity as capital providers(IASB, 2008). Drawing on prior research, relevance is operationalized using four items referring to predictive and confirmatory value. Many researchers have operationalized predictive value as the ability of past earnings to predict future earnings (Francis et al., 2004). Confirmatory value to the relevance of financial reporting information if it confirms or changes past (or present) expectations based on previous evaluations (IASB, 2008).
Faithful representation is the second fundamental qualitative characteristic in the standard. To faithfully represent economic phenomenon that information must be complete, neutral, and free from material error. Faithful representation is measured using five items of neutrality, completeness, freedom from material error, and verifiability (Willekens, 2008).
The first enhancing characteristic, understand ability, will increase when information is classified, characterized and presented clearly and concisely. According to IASB (2008), understand ability is when the quality of information enables users to comprehend their meaning. Courtis (2005) argues that understand ability is measured using five items that.
Proper Record keeping, when the there is proper record keeping in an organization This is to blame for most of procurement fraud in the developing countries, maintaining a proper records of providers is vital and when organizations do not maintain a record of their providers they are prone to fraud (Farrington et al, 2006).
Giving employees training facilities so as to increase their performance and skills; many organizations spend billions of dollars on training their employees so that they are able to produce quality products which match the company’s goals and also to stand out in the competitive automobile industry, (Handfield et al, 2006).
Provisions of secretaries with enough facilities which is needed for them to execute their duties such facilities may include computers, printers, type writers, telephones, books, pens and other technological; equipment’s needed to facilitate the work of a secretary in an organization this will enable them perform efficiently and effectively so as to be productive and add value to the organization (Greenberg et al, 2000).
Better remuneration of employees is key towards better performance of employees , according to Ernst and young, (2004), employees who are better remunerated love their jobs since they are able to provide for their families this therefore motivates them and increases their productivity while organizations with poor remuneration for the employees were found to be characterized by employees who arrive late at the company, and are also absentees in their duties most of all they are found of lacking respect for their superiors and in turn do not perform their duties efficiently.
Providing proper working environment promotes good performance amongst employees when an organization has good working environment for the employees their productivity will increase while an organization with poor working environment will definitely have poor performing employees. (Burri et al, 2001).
Creation of good working relationship between workers and subordinates is essential towards creating better performance amongst employees and if the relationship between employees and management is not at its best organizational employees will feel demotivated with work and in turn their productivity will also lower, (Chandrasekar 2011).
Communication of organizational goals to the employees has the potential of improving the performance of employees when the employees like secretaries are aware of the organizational goals and what is expected of them and above all when the organization introduces a standard performance in which is required of employees this will improve performance of employees as it will make them work towards a standardize procedures, (Stup, 2003).
Generally, codes of ethics forbid conflicts of interests. Often, however, the specifics can be controversial. Codes of ethics help to minimize problems with conflicts of interests because they can spell out the extent to which such conflicts should be avoided, and what the parties should do where such conflicts are permitted by a code of ethics. Thus, professionals cannot claim that they were unaware that their improper behavior was unethical. As importantly, the threat of disciplinary action helps to minimize unacceptable conflicts or improper acts when a conflict is unavoidable. As codes of ethics cannot cover all situations, some governments have established an office of the ethics commissioner (Porter and Thomas, 2002).
2.4 Relationship between ethics and financial management
Drury (2011) indicated that financial management in an organization has a direct influence on the overall performance of the organization. From the above one can define performance measurement as the comparison of outcomes of activities or processes with the strategic goals of an organization. The comparing of actual results with strategic outcomes represents performance measurement. Performance measurement therefore strengthens the principles of corporate governance as it promotes accountability and openness to stakeholders. Performance measurement is the link between what is set out to do and what is actually achieved.
Performance measures are the indicators or predetermined targets that are used to measure performance. These measures indicate to management the areas where it is going to plan and where to make changes or adoptions in order to meet the strategic goals of an organisation. The three Es of financial management should in line with the performance measures. Lapsley (2016) referred to the three Es and appropriateness as what performance measures usually take into account Economy which refers to the acquisition of the appropriate quality and quantity of financial, human and physical resources at the appropriate time and place and at the lowest possible cost, efficiency which refers to the use of resources so that output is maximized for any given set of resource inputs, or input is minimized for any given quantity and quality of output provided, effectiveness which refers to the extent of the achievement of set or predetermined outcomes, objectives or other intended effects of programmes, operations, activities or processes, and Appropriateness which deals with whether the objectives or outcomes of programmes, operations, activities or processes address the real needs of customers Efficiency in financial management is important to enable the organization achieve its goals and objectives. Efficiency‘means doing the same as before, but with fewer resources in terms of money, staff, space, etc. Efficiency is a measure of productivity, i.e. how much you get out in relation to how much you put in. The efficiency of services such as rent collection may be measured by the cost of the service compared to the rent roll. Efficiency is primarily associated with the process and the best use of resources (also involves the delivery of procurement). It includes whether you get it right first time or whether you have duplication (Anderson, et al, 2011)
Proper financial management eliminates conflict of interest in the organization according to Thembileet al, (2005) he further asserts that during accounting process, an employee might not disclose a conflict of interest concerning a certain service provider. For example, the employee might award a contract to a relative’s company. This hidden interest is not in the interests of the organization. An employee might receive kickbacks from suppliers in exchange for approval to either order from or make a payment to them, when goods have not been fully supplied or are charged at a higher price. They added that Staff from the donor organization can be bribed by an entity manager, so that during the monitoring process some instances of non compliance are ignored.
According to Dervaes (2006) for an organization to have an efficient financial management it has to ensure that employees are fully motivated and willing to work towards organizational cause.In some countries working for an organization is an admirable and attractive occupation, but in others it is no longer as gratifying as it used to be. There are a number of reasons for this, ranging from restrictive legislation targeted at organization, single party autocratic government, donor fatigue and the presence of civil strife. Most employees working in such environments are tempted to engage in fraudulent activities, as they cannot make personal plans beyond the next twoyears at most. Most organizations operating in difficult environments have strategic plans ranging from six months to a year, and so the staff contracts may vary with the organization’s planning strategies. Organizations generally employ younger people who may be starting families, or who have young families, and need financial security.
Proper record keeping enhances organizational financial performance, this is to blame for most of accounting fraud in the developing countries, maintaining a proper records of providers is vital and when organizations do not maintain a record of their providers they are prone to fraud (Farrington et al, 2006).
Accounting officers should be encouraged to maintain proper record keeping and management to provide bases for tracking fraudulent accounting and accounting entities should provide conducive environment that should be supported by trained skilled and professional experts the reports add that non compliant officials should be prosecuted in courts of law (PAC Reports, 2009-10).
Staff remuneration is a key component of better financial performance in an organization Hansen et al, (2015), he further states that an organizational has to ensure that when there are low levels of financial management in an organization. Financial management of the organizational reduces key challenges like fraud thereby enhancing better organizational performance; Staff and external suppliers can be involved in this fraud when obtaining refunds for cancelled workshops, membership and subscriptions, or overpayment for services. Employees can design schemes whereby they duplicate payments to vendors and only deliver one cheque, converting the other to cash.
Chikanza et al, (2005) asserts that poor payment of employees leads to employee revenge against the organization due to being overlooked for advancement, overworked, in order for them to gain from other sources making them to act in fraudulent manner, leading to fraud, poor payment in the organization has poor effect in the
According to Luway, (2009), civil society organizations, believe that they are activists who are not concerned about monetary gain. Employees of organization are engaged with changing the social status of human kind and empowering them with human rights education so that they make informed decisions and choices. With the current change in the economies and political dispensation of many countries, the cost of living is soaring and the risk associated with human rights activism is now too great so that staff feel the need for market related remuneration. Unfortunately most organizations in developing countries are unable to pay attractive salaries, particularly to local staff. Weakens the financial position of organization, as programs are abandoned midway and in some instances staff can go without salaries.
Political influence in accounting, in accounting is to blame for accounting fraud in most organization, According to the Global integrity report 2008, it has been noted that although there are penalties, Accounting process especially big accounting contracts tend to involve high profile politicians, who influence the process & therefore usually protect the individuals who may be implicated. The regulations are in place but not effective due to the influence assumed by accounting personnel and how they manipulate the system to attain their own ends (IGG reports, 2010). According to report on the Newspaper (daily monitor Monday 23 may 2011), Uganda revenue authority (URA) noted that the government is losing revenue as a result of organized crime between staff of the institution and officials of clearing and forwarding firms.
Level of Corruption, is one of the main proposed causes of accounting fraud, The government of Uganda in its National Strategy to fight corruption and rebuild ethics and integrity in Public Office (2004–2007) launched in July 2004, recognizes that corruption in public accounting and service delivery poses a serious obstacle to economic and social development in Uganda.
Accounting skills of employees, amongst the accounting staffs, has led to fraud in most parts of the world , accounting profession is a relatively new profession unlike accountancy , medicine , law and so most parts of the world still lack qualified accounting profession , this limited skill has caused fraud in most institutions around the world, (Lysons, 2006).
Ntayi (2005) has noted that accounting operations require experts to carry out public accounting at the private and public sector levels. The PPDA as the regulatory public accounting body should provide enough personnel to carry out the function. Besides, there should be training to provide knowledge and skills of the scope and dynamics of public accounting as required by the (PPDA Act, 2003).
Motives of employees, According to Thembile et al, (2005), an employee may come under extreme financial stress, if she or he has health problems or family members are chronically ill. An employee may desire to solve a need or seek to attain a certain lifestyle. Possibly there may be gambling or alcohol-related problems. Unfortunately the manager cannot do much about such motives, but it is important that they are identified. Internal motives emanate from the workplace if an employee feels they are being underpaid, are unfairly treated in an appraisal interview, are given high volumes of work, leading to stress, and an employee perceiving that promotions are based on work politics and not performance. This may lead to fraudulent act
According to Dervaes (2006), internal motives emanate from the workplace if an employee feels they are being underpaid, are unfairly treated in an appraisal interview, are given high volumes of work, leading to stress, and an employee perceiving that promotions are based on work politics and not performance. This may lead to fraudulent act
Motivation and revenge, Motivation is another critical element. It includes financial need, challenge, and revenge. When the trusted employee has a financial need in their life, the motivation factor kicks in to permit the individual to perform an illegal act (Joseph R. Dervaes 2006).
Dervaes (2006) asserts that, the financial need can be either real or perceived (i.e.; greed). They become desperate and see no other alternative to solve their financial crisis. Sometimes this is the most visible element of change in a person’s life actually observed by fellow employees in the office. But, sometimes the individual commits fraud by exploiting the organization’s computers, accounting systems, and internal controls as a challenge. Breaking the organization’s codes and passwords is perceived as a game. The most dangerous person is one who seeks revenge against the organization. This wayward employee seeks to financially destroy the organization in retaliation for the poor treatment they’ve received in the past. Employees who have lost their jobs, been passed-over for promotions, or who did not receive a raise fall into this category.
According to Chikanzaet al, (2005) Opportunity, and Motives are translated into action when there is an opportunity to commit fraud. If that opportunity is not there, temptation is removed. Opportunity can present itself if a cheque book is kept in an unlocked office drawer, or a manager travels often and signs blank cheques for activities or purchases whose actual amounts are not yet available. This presents a great opportunity for the staff to tamper with the cheque book or the signed cheques. A manager can establish “opportunity” through studying the organization and searching for weaknesses. An employee can omit a procedure once, and on realizing that no one has noticed, can skip the procedure in future, which can be used by colleagues to commit fraud. Other examples of “opportunity” include someone working for an organization with weak controls, such as only requiring one signature on a check, those who use an organization’s credit card but also approve all credit card purchase. All these prevail opportunities for fraudulent act.
