Profitable activity

The maximization of profit has been traditionally regarded as the principal factor motivating the individual to invest in a business venture. However, business organizations, particularly the very large ones, have responsibilities which are wider than the obligation to produce an adequate return for their investors. A list of the responsibilities acknowledged by business people can be obtained by examining the corporate objectives declared by company chairpersons in their annual reports to shareholders. These include such matters as an increase in the market share, the improvement of product quality, a contented workforce, pollution-free production processes, the maximization of exports and survival.

It is difficult to say whether these aims are each of equal importance, but probably they are not. One view is that profit maximization is the main objective, and other stated goals have, as their central purpose, to contribute either directly or indirectly to the long-run achievement of that principal aim. This view may attach rather too much significance to profit, but widespread agreement that profit is an essential product of business activity in the UK can safely be assumed.

There are basically two competing claims on the profits generated by business activity:

1 Withdrawals. The owner requires a satisfactory return on his or her investment in the form of drawings or dividends. An inadequate return will cause him or her to close down the business and invest his or her money elsewhere.

2 Reinvestment. The second claim on profit arises from the fact that retained profits are a major source of finance for business expansion. For example, the balance sheet of Unilever plc at 31 December 1999 shows share capital as £134 million while retained profits amount to £2,903 million, i.e. over 21 times as much. The retention of profits increases the value of the owner’s investment in the business, of course, and should produce higher profits and dividends in the future.

Ethics and accounting

Accountants have a significant responsibility to the public. This responsibility exists because outside shareholders, creditors, employees, and others rely on financial statements in making various business decisions. Business organizations employ internal accountants to prepare financial statements. These statements are then audited by a firm of independent CPAs. Both the internal accountants and the external auditors have a responsibility to perform their tasks with integrity and due care. Various accounting organizations promote high standards of ethical behavior. One example is the American Institute of Certified Public Accountants (AICPA), which is a professional organization that serves CPAs who work for public accounting firms or other organizations (such as corporations). Its Code of Professional Conduct emphasizes the obligation of CPAs to serve the public interest, and their responsibility to act with integrity, objectivity, independence, and due professional care. In a given situation, formalized codes of ethics can often help in deciding the proper course of action. However, some situations are sufficiently complex that the codes do not provide clear guidance. Fortunately, ethicists have developed frameworks for examining ambiguous ethical situations.

Two of these frameworks, utilitarianism and deontology, are briefly described next.

Utilitarianism judges the moral correctness of an act based solely on its consequences. According to this perspective, the act that should be taken is the one that maximizes overall favorable consequences (net of unfavorable ones). Consequences not only to the actor but to all parties should be considered.

The proponents of deontology assert that the consequences of an act do not exclusively dictate moral correctness. They believe underlying nature of the act itself influences its correctness. However, within deontology are two different perspectives. Some deontologists feel that the nature of an act is the only thing to be considered in assessing its moral correctness. Other deontologists assert that the nature of the act and its consequences in a particular situation should both be considered.

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