Accounting Ethics Chapter 3

Accounting Ethics Chapter 3 Flashcards for Exam #2

What is fraud?

Fraud is the deliberate misrepresentation to gain an advantage over another party or have them do something they may not ordinarily do.

What is the most common method used to expose fraud in organizations and what percent comes from this method? WHat two methods follow this method on the list?

The most common method used to report fraud is “Tips”. 43% Internal Audit, management review.

True or False, hotlines play an extremely important role in increasing how many tips are given regarding fraud?

True

What is the most common anti fraud control that results in one of the lowest detections of fraud? What percent of fraud are caught using this method? Is an external audit designed to detect fraud?

External audit. 4%. The external audit is designed to ensure financial statements follow GAAP however fraud may be uncovered during the audit.

What are the two most common red flags indicating someone may be committing fraud?

(1) Living beyond ones means. (2) FInancial difficulties

Why do some employees not report fraud even if they know it is happening?

Some employees may fear nothing will be done and they may face negative consequences of reporting it.

What are the three situational factors that appear to be present in every case of financial statement fraud?

(1) Perceived opportunity - The individual feels they may benefit without getting caught

(2) Situational Pressure - There is pressure within the environment to meet or exceed certain expectations

(3) Rationalization - The act is able to rationalized and they may believe it is in their best interest or the best interest of the company to commit the fraud

What must exist in a workplace for fraud to be minimized?

Ethical Culture

When does ethical collapse take place?

Ethical collapse takes place when an organization drifts from the basic principles of right and wrong.

What are the seven signs of ethical collapse?

(1) Pressure to maintain numbers

(2) Fear and silence

(3) Young ‘uns and a bigger-than-life CEO (loyalty to the boss)

(4) Weak board of directors

(5) Conflicts of interest overlooked or unaddressed

(6) Innovation like no other company

(7) Goodness in some areas atones for evil in others

Explain the 1st sign of ethical collapse “pressure to maintain the numbers”

There is an unreasonable and unrealistic obsession with meeting quantitative goals. Or “financial results at all costs.”

Describe the second sign of ethical collapse in an organization “Fear of reprisals. or fear and silence.”

This means the organization has an organization of fear and silence. This means no one speaks out due to fear of getting punished.

Describe the third sign of ethical collapse in an organization “Loyalty to the boss.”

This means surrounding yourself with young workers and showing them “success” and expensive belongings so they don’t speak out out of fear they will lost their expensive stuff.

Describe the fourth and fifth sign of ethical collapse in an organization “Conflicts of interest and weak board of directors.”

This means that if an individual works at a company who shows signs of conflict of interest or a board of directors who do not enforce rules there is sign of ethical collapse.

Describe the sixth sign of an organizations ethical collapse which is “innovations”.

Some companies may feel they are too innovative or forget about doing the right thing and only focus on innovation. This may be a sign of ethical collapse in an organization.

Describe the seventh sign of ethical collapse in an organization “goodness in some areas atones for evil in others.”

This means many companies rely on their culture as evidence of their ethical goodness. You can’t just do basic good things and expect those to cancel out bad things the company may do.

What are the five factors the separate a good and great compliance program?

(1) Tone at the top

(2) Corporate Culture

(3) Risk Assessments

(4) The Chief Compliance Officer

(5) Testing and monitoring

What did Albert Camus say about integrity and people?

He said integrity has no need of rules and people of integrity and self driven to do the right thing.

What is protected when using social media to criticize the employer?

Personal gripes and complaints are not protected however employees discussing important matters such as work conditions or treatment of workers etc is protected.

What does “Duty of care - managers and directors mean”? What does the standard of due care mean?

This means that directors and officers are deemed to be fiduciaries of the corporation because of their relationship with the corporation and its shareholders. This means that they owe ethical and legal duties to the corporation and shareholders.

This means that a director or officer should act in good faith and exercise the care that an ordinarily prudent person would exercise in similar circumstances, and act in a way that is considered to be in the best interest of the corporation.

What does “Duty of loyalty” mean?

Duty of loyalty means that the director must place the interests of the corporation ahead of personal interests.

What does Duty of Good Faith mean?

An honesty of purpose that leads to caring for the well-being of the constituents of the fiduciary

What is the business judgement rule?

Corporate directors or officers may be able to avoid liability to the corporation or to its shareholders for poor business judgements under the business judgement rule. This means honest mistakes of judgement and poor business decisions on their part do not make them liable. This does not however protect reckless behavior.

What does it mean to establish corporate governance?

Corporate governance entails developing formal systems of accountability, oversight, and control

What is the shareholder model of corporate governance?

This model is founded on classic economic precepts such as maximizing wealth for investors and credits.

What are executive pay packages and issues that come with them?

Executive pay packages are compensation packages given to top managers that encourage them to place large emphasis on the performance of the company. The problem that arises when companies use these compensation methods is that often times top executives will manipulate earnings to earn more themselves.

What are clawback provisions?

These are contract clauses designed to ensure that company executives don’t manipulate financial information to hit certain earnings targets linked to their compensation payments. Requires executives to pay back bonuses they received if the incentive was based on a performance bench mark that was incorrect.

What features are required for a board of directors for a company that lists their equity securities on the NYSE or NASDAQ stock market?

(1) Independent Directors - This means having a director with no material relationship with the company

(2) Audit Committee - Audit committee must meet independence requirements

What are corporate social responsibilities?

Corporate social responsibilities are the ethical expectations that society has for business.

What is sustainability?

Sustainability describes the ability to maintain various systems and processes- environmentally, social, and economically-over time.

What is the triple bottom line? (Hint: Three Ps)

People, Planet, Profit. TBL Describes the scope of reporting in three broad areas affecting society, economic, ecological, and social .

What is conscious capitalism? What are the four key principles?

Conscious capitalism is a relatively new concept and a natural part of corporate social responsibility.

1. Higher purpose - While profits are essential for sustainable business, conscious capitalism focuses on purpose beyond profit

2. Shareholder orientation - Conscious companies operate with their entire business ecosystems in mind, meaning they concentrate on optimizing equal values for all of their stakeholders

3. Conscious leadership - With a we rather than a me mentality, conspicuous leaders embrace the company’s purpose, create value, and inspire actions.

4. Conscious culture - Conscious capitalism contributes to a culture of trust, care, and cooperation among the company’s employees and all other stakeholders.

What is the economic model of corporate social responsibility?

The economic model states that businesses exist to serve the interests of society. This may mean to produce goods and services needed, create jobs, and providing wealth for investors. States shareholders are the center of the corporation and the responsibility of the corporation is to serve the shareholders.

What is the stakeholder model of corporate social responsibility?

This is a broader version than the shareholder model and recognizes that business exists to create value for a range of parties, including employees, customers, suppliers, and communities as well as investors and stockholders.

What effective device is mentioned in the book to ensure audit committee independence?

It’s state the audit committee should meet separately with senior executives, internal auditors, and external auditors.

What are the duties of the audit committee? (7)

(1) Monitor the integrity of financial statements

(2) Review any formal announcements relating to financial performance

(3) Review significant financial report judgements contained in the statements

(4) Review internal financial controls and risk management procedures

(5) monitor the effectiveness of the company’s internal audit function

96) review the company’s whistleblower processes and compliance program

(7) review and monitor the external auditors independence and objectivity

What are the four roles of internal auditors?

(1) Monitor corporate governance activities and compliance with organization policies

(2) Review effectiveness of the organizations code of ethics and whistleblower provisions

(3) Assess audit committee effectiveness and compliance with regulations

(4) oversee internal controls and risk management processes

What is the primary role of external auditors?

Protect the interests of shareholders

When is whistle blowing moral?

Whistle blowing is moral when it is morally required

When are whistle blowers protected under dodd frank?

If they report the matter to the SEC

How is a whistleblower defined under Dodd-Frank provisions?

A whistleblower is any individual who provides information to the SEC relating to a violation of the securities laws that has occurred, is ongoing, or is about to occur.

What does original information mean under Dodd-Frank provisions?

The ifnormation must provide a new insight beyond what would be reasonably apparent to the agency from publicly available infromation.

Do internal accounts qualify for Dodd-Frank awards?

No Internal accounts are excluded from receiving whistelbower awards because of their pre-exist legal duty to report violations.

Under what three situations do internal accounts qualify to become dodd-frank whistleblowers?

(1) Disclosure to the SEC is needed to prevent substantial injury to the financial interest of an entity or its ivnestors

(2) The whistleblower reasonably believes the entity is impeding investigation of the misconduct

(3) The whistleblower has first reported the violation internally and 120 days has passed with no action.

Can external auditors receive dodd-frank whistleblowing awards?

No

What are the prescribed steps for an external auditor to take before deciding to inform the SEC of fraud? Can the auditor obtain an award following these steps?

1 Determine whether the violations have material effect

2 If yes has management or the board of directors caused management to take remedial action

3 If no then the auditor must make a formal report of its conclusions and provide the report to the board. The board then has one business day to inform the SEC and provide a copy of the communication to the external auditor. If the auditing firm does not receive a copy within on business day, then it has two choices.

a. provide a copy of its own report to the SEC within on business day or

b. resign from the engagement and provide a copy of the report to the SEC within one business day of resigning

Yes

Do confidentiality agreements trump whistleblower rights?

No

What are the rules regarding disclosure of confidential information in a complaint?

You should only disclose the minimum of what is required to pursue the claim.