ACCT 5198/6098- Chapter 1 Reviews
ACCT 5198/6098- Chapter 1 Reviews ACCT 6098
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This 16 page Bundle was uploaded by Doris.Shaw on Sunday September 11, 2016. The Bundle belongs to ACCT 6098 at University of Cincinnati taught by Pr. Larson in Fall 2016. Since its upload, it has received 42 views. For similar materials see Accounting Ethics in Accounting at University of Cincinnati.
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Date Created: 09/11/16
Exam Outline Coverage: Class Lecture and Discussion; Text Chapter 1; Articles 1 & 2; all homework assignments Exam ran long, so moving 2 chapters from Predictably Irrational to Exam 2 Points: Exam worth 125 points; Test will have a possible 136 points (so includes 11 possible bonus points) Format: Matching (28 points), Multiple Choice (72 points), Short Answer (12 points) and Mini-Case (24 points) Chapter 1 is only 42 pages – but contains a great deal of material – so know it well! A significant portion of the exam will be related to knowing the terminology, basic definitions, etc. in Chapter 1 that we will need to know as we move forward in the text/class. All Ethical Reasoning Method Bases on Exhibit 1.3 are fair game - so know definitions, how they function, advantages/disadvantages, etc. Go there. Read the Hofstede / Cultural Values 1 1/2 pages very carefully - know it well, particularly definitions of cultural dimensions. Go there. IMA Code of Ethics: IMA/CMA - know extremely well, including the specific components of each of the 4 main points Go there. Several questions will involve ethical situations – so know how to apply theories as well as what the best answer would be in the context of the IMA code of ethics. Articles – 2 or 3 MC questions Go Outlines. Article 1 Article 2 Hope that helps! All Ethical Reasoning Method Bases on Exhibit 1.3 are fair game - so know definitions, how they function, advantages/disadvantages, etc. Moral philosophies provide specific principles and rules that we can use to decide what is right or wrong in specific instances. They can help a business decision maker formulate strategies to deal with ethical dilemmas and resolve them in a morally appropriate way. The discussion to those that are most applicable to the study of accounting ethics, including teleology, deontology, justice, and virtue ethics. Teleology an act is considered morally right or acceptable if it produces some desired result such as pleasure, the realization of self-interest, fame, utility, wealth, and so on. looking at its consequences, so also referring as consequentialism. Two important teleological philosophies: egoism and utilitarianism, guiding decision making in individual business decisions. Egoism Defines right or acceptable behavior by consequences for the individual. Make decisions that maximize their own self-interest Enlightened Egoism One form of egoism that emphasizes more of a direct action to bring about the best interests of society. Take a long-range perspective and allow for the well-being of others Help achieve some ultimate goal for the decision maker Their own self-interest remains paramount. Difference If you are an egoist, you might conclude that it is in your best interests to go along with the firm’s position, to support the client’s presumed interests. After all, you do not want to lose your job. An enlightened egoist would consider the interests of others, including the investors and creditors, but still might reason that it is in her long-run interests to go along with the firm’s position to support the client because people may not advance within the firm unless be perceived to be a “team player.” Utilitarianism Bentham & Mill follow a relatively straightforward method Requires that people look beyond self-interest evaluating the benefits and harms on stakeholders by an action & pick greatest net benefit. Two Types: Act-U & Rule-U Act-U Examines the specific action itself versus general rules If the overall effect of giving in to the client’s demands brings net utility to all the stakeholders, then the rule is set aside. Rule-U Bases behavior on conforming to the general rule designed to promote the greatest utility “never compromise audit independence.” Maximize intrinsic value and minimize intrinsic disvalue. General principle that morality must depend on balancing the beneficial and harmful consequences of conduct, notwithstanding differences between two Difficulties Impossible to foresee all consequences; Consequences difficult to measure Deontology “duty” Fundamental idea: equal respect must be given to all persons moral norms establish the basis for action focus on the rights and the intentions/motivation; based on reason and means, not outcomes Be divided who focus on: moral rules & nature of the acts themselves Act deontology: principles are applied by individuals to each unique circumstance Rule deontologists: general moral principles determine the relationships particularly appropriate to the accounting profession Rights Principles Thomas Hobbes and John Locke; Kant (influential interpretations) Categorical Imperative 绝对命令 • Motivated by sense of obligation • Universality of moral actions • People must always be treated as an end, not merely as a means. Difficulties Moral Absolutes No clear way to resolve conflicts between moral duties For Accounting: The ultimate obligation of accountants and auditors is to honor the public trust. The public interest obligation that is embedded in the profession’s codes of ethics requires that if a conflict exists between the obligations of a decision maker to others, the decision maker should always decide based on protecting the public’s right (i.e., investors and creditors), such as in the receivables example, to receive accurate and reliable financial information about uncollectibles. Justice issues of rights, fairness, and equality Justice means giving each person what she or he deserves. Justice and fairness are closely related terms Differences: Justice: reference to a standard of rightness Fairness: regard to an ability to judge without reference to one’s feelings or interests. Most fundamental principle of justice: equals should be treated equally and unequals unequally. Justice as fairness is the basis of the objectivity principle in the AICPA Code that establishes a standard of providing unbiased financial information Fairness will be tied to making objective judgments. Auditors should render objective judgments about the fair presentation of financial results, acting as impartial arbiters of the truth. The ethical principle of objectivity requires that such judgments be made impartially, unaffected by pressures that may exist to do otherwise distributive justice When people differ over what they believe should be given, or when decisions have to be made about how benefits and burdens should be distributed among a group of people, questions of justice or fairness inevitably arise. Procedural justice For purposes of future discussions about ethical decision making: considers the processes and activities that produce a particular outcome. E.g.: an ethical organization environment should positively influence employees’ attitudes and behaviors toward work-group cohesion. When there is strong employee support, procedural justice is less important to the individual. a potential whistleblower who feels confident about bringing her concerns to top management because specific procedures are in place to support that person. Virtue Ethics differences from others: apply both to the decision maker and to the act under consideration by that party. Less emphasis on learning rules; emphasizes moral education. Stress importance of developing good habits of character Plato’s 4 cardinal virtues: wisdom, courage, temperance, and justice; Other important virtues: fortitude, generosity, self-respect, good temper, and sincerity. Should avoid acquiring bad character traits, or vices, such as cowardice, insensibility, injustice, and vanity. MacIntyre: “community: every practice requires a certain kind of relationship between those who participate in it. Mintz: accounting profession is a practice with inherent virtues ethical obligations to clients, employers, the government, and the public at large. must be committed to perform such services without bias and to avoid conflicts of interest. Independence; fairness of financial statements; Integrity; Act out of moral principle, not expediency Never let loyalty cloud good judgment & ethical decision-making Moral Point of View: Emphasizes practical reason & rational choice Deliberation precede choice of action(Reason;Thought;Voluntary) Ends do not justify the means Personal Integrity: Essential characteristic for CPA and Learn to be ethical, by practice, Exercising virtues and Enable to lead life of excellence To Top Read the Hofstede / Cultural Values 1 1/2 pages very carefully - know it well, particularly definitions of cultural dimensions. Cultural Values Four cultural dimensions Geert Hofstede one of the most comprehensive studies of how values in the workplace are influenced by culture Between 1967 and 1973, Using responses of 116,000 IBM employees in 39 countries To describe general similarities and differences in cultures around the world Individualism Power distance Uncertainty avoidance Masculinity a fifth dimension Hofstede In 2001, long-term orientation—initially called Confucian dynamism a sixth variable was added More recently, a result of Michael Minkov’s analysis of data from the World Values Survey Hofstede’s Cultural Dimensions (five) * High scores indicate a propensity toward the cultural variable; low scores indicate the opposite. Leading industrialized nations: Japan, UK, US Four major emerging economies: BRIC countries (Brazil, Russia, India, and China) Purposes: To explain how workers from different cultures might interact in the workplace. The key point: cultural sensitivity is an essential ingredient in establishing workplace values and may affect ethical behavioral patterns. Explanation: Individualism (IDV) focuses on the degree that the society reinforces individual or collective achievement and interpersonal relationships. In individualist societies (high IDV) people should look after themselves and their direct family UK and US an individual blowing the whistle in collectivist societies (low IDV)people belong to “in-groups” that take care of them in exchange for loyalty collectivist values: China and Japan covering up the behavior of one member of the group in order to “save face” Uncertainty Avoidance (UAI) describes the tolerance for uncertainty and ambiguity within society, having important implications for workplace behavior. high UAI a low tolerance of uncertainty and ambiguity, so institute laws, rules, regulations, and controls to reduce the amount of uncertainty Russia difficulty of doing business in low UAI more tolerance for a variety of opinions UK and US Power Distance index (PDI) focuses on the degree of equality between people in the country’s society, also having important implications for workplace behavior High PDI inequalities of wealth and power have been allowed to grow within society China and Russia Long-term orientation (LTO) VS short-term orientation illustrate one of the differences between Asian cultures, such as China and Japan, and the United States and United Kingdom High LTOreflect the values of long-term commitment and respect for traditionChina and Japan Low-LTO changes can occur more rapidly UK and US Time- a stumbling block for Western-cultured organizations entering the China market. The length of time- two or three times added. Brazil and India show less variability in their scores, perhaps reflecting fewer extremes in cultural dimensions To Top IMA Principles: Honesty; Fairness; Objectivity; Responsibility Standards: Confidence; Confidentiality; Integrity; Credibility Resolution of Ethical Conduct Discuss issue with immediate supervisor or higher authority. Clarify ethical issues with an IMA Ethics Counselor or other impartial advisor Consult attorney To Top Outline of Article 1 Tone at the top: Why investors should care. Alfred M. King (2013) Tone at the top: provided a potential way to appraise whether the top management complied with the ethical standards. Those companies with a good tone at the top insisted on disclosing all news, not covering up bad news, that’s likely to influence shareholder actions and behavior. Conversely, companies whose top management slacked their duty on the discipline more likely to get into trouble. Three examples- Groupon, Inc.; Chesapeake Energy; and Enron to demonstrate the poor tone at the top the cases showed that If the tone set by management is lax, fraudulent financial reporting is more likely to occur. Three potential sources are available for shareholders to evaluate tone at the top: 1. Auditors- auditors may be in the best position to know the company’s tone at the top but the worst position to communicate their beliefs to public shareholders. 2. Rating Agencies- the rating agencies want to justify any negatives in quantifiable terms for the company they are rating rather than intangible item such as tone at the top. 3. Security Analysts- because of confidential, valuation reports aren’t usually published to public. Besides, sell-side security analysts often hedge their feeling about the top management. A modest suggestion to solve the above issue that disclosure is blocked: Security analysts should also be required to rate the company’s accounting by using the terms conservative, neutral, and aggressive. conclusion There’s a high correlation between aggressive accounting and a relatively poor tone at the top.’ ‘While a good tone at the top isn’t a guarantee of future stock market performance, history suggests that well-managed companies have superior financial performance over the long run.’ To Top Outline of Article 2 When Do We Hold The Accountants Accountable? By: Jeff Adler, CPA Issues found by SEC: Financial close that aren’t adequately designed…processes & procedures Controls aren’t in place to provide reasonable assurance… Adequate policies & procedures aren’t in place… it’s clear that the companies didn’t have internal processes in place to make sure their accounting records were accurate. This is where controls come into play. Controls help establish processes to make sure something is done—and done properly—by a deadline. Consequences Hiring Consultant(s)/Process Experts Loss of Investor Confidence Public Scrutiny Bankruptcy Loss of Credibility All of these issues arose from what should have been part of basic reporting and control activities. In cases like this, it often takes a year after instituting controls before a company’s financial processes can be relied on to generate accurate and timely financial statements. Once the new systems are in place, you have to have proof they are working, and that happens only with evidence documented during a period of time. Who should take responsibility? The financial investing market The accountants If the underlying numbers are wrong, then all the financial reports and financial analyses are worthless. Senior financial management But these basic rules must be part of continuous oversight. If basic accounting activities aren’t addressed as a critical control in the beginning, a company is opening the door for potential issues down the line. Audit committees Solution: how do we management accountants get control of this? Accounting software can help Help us monitor and control these basic functions. Strong Internal Control; Documentation, Communication To ensure accuracy and completeness of the numbers from the beginning, it needs to put a world- class process in place: Make available all current policies & procedures Standardized reconciliation templates information is reported and explained consistently. Secure information can be accessed easily by authorized users, regardless of time of day or location. Multiple training delivery methods in place to ensure staff is taking advantage of the full functionality of any technology tools and systems, meeting company standards, and following procedures. Workflow that’s defined, automated, & controlled to ensure the highest level of visibility to reports, audit logs, and the like with minimal time commitment and/or effort from senior staff. Management Assurance：Then the CFO and CEO must review and attest at least quarterly that internal financial controls are in place and adequate. This is an SEC requirement that also includes annual attestation by the company’s auditors that the CFO and CEO attestations are accurate. Good intentions don’t always mean good accounting practices. It’s our duty as management accountants and financial managers to take accountability and build communication and trust within our organizations. We must always remember that our first obligation is to generate complete and correct financial reports—which starts with having accurate account reconciliations. How to Improve the Situation Trustworthiness throughout the company; Can anything really be confidential? Strong ethical, open cultures; Communicate/ Check up Organizations with comprehensive ethics & compliance programs Protect those who come forward with concerns Target managers with anti-retaliation training Take steps to ensure no retaliation occurs Confidentiality Quick, Decisive Action To Top 1 Ethical Reasoning:Implications for Accounting After studying Chapter 1, you should be able to: LO 11 Explain how integrity enables a CPA to withstand pressures and avoid subordination of judgment. LO 12 Discuss the relationship between one’s values and ethics, and legal obligations. LO 13 Describe how the pillars of character support ethical decision making. LO 14 Differentiate between moral philosophies and their effect on ethical reasoning in accounting. LO 15 Explain the concept of the public interest in accounting. LO 16 Discuss the Principles section of the AICPA Code of Professional Conduct. LO 17 Apply the IMA Statement of Ethical and Professional Practice to a case study. 1. Integrity: The Basis of Accounting A person of integrity will act out of moral principle and not expediency. Integrity means that a person acts on principle—a conviction that there is a right way to act when faced with an ethical dilemma. An important point is that a professional must never let loyalty to a client cloud good judgment and ethical decision making. The ethical responsibility of a CPA in these instances is to adhere to the ethics of the accounting profession and not to subordinate professional judgment to the judgment of others. Integrity encompasses the whole of the person, and it is the foundational virtue of the ancient Greek philosophy of virtue. 2. What Is Ethics? Gaa and Thorne define ethics as “the field of inquiry that concerns the actions of people in situations where these actions have effects on the welfare of both oneself and others.” We adopt that definition and emphasize that it relies on ethical reasoning to evaluate the effects of actions on others—the stakeholders. Difference between Ethics and Morals 1. Ethics refer to rules provided by an external source, but Morals refer to an individual’s own principles regarding right and wrong. 2. Ethics tend to be more practical than morals. 3. Another important distinctionmoral standards based on a person’s actions and a person’s character, which includes their attitudes and beliefs. But Ethics involve the study and application of those standards and judgments which people create or are established by organizations. So, we could say that ethics are the operational side of morality Values and Ethics, legal obligations In accounting, the values of the profession are embedded in its codes of ethics that guide the actions of accountants and auditors in meeting their professional responsibilities. Values are concerned with how a person behaves in certain situations and is predicated on personal beliefs that may or may not be ethical, whereas ethics is concerned with how a moral person should behave to act in an ethical manner. Laws create a minimum set of standards. Ethical people often go beyond what the law requires because the law cannot cover every situation a person might encounter. Ethical people often do less than is permitted by the law and more than is required. Situation Ethics: recognize the existence of normative principles but question whether they should be applied as strict directives (i.e., imperatives) or, instead, as guidelines that agents should use when determining a course of ethical conduct. 3. The Six Pillars of Character Six Pillars of Character that provide a foundation to guide ethical decision making. These ethical values include trustworthiness, respect, responsibility, fairness, caring, and citizenship. Trustworthiness include being honest, acting with integrity, being reliable, and exercising loyalty in dealing with others. PS: Ethical values sometimes conflict, and loyalty is the one value that should never take precedence over other values such as honesty and integrity Responsibility for accounting professionals means to meet one’s ethical and professional obligations when performing services for an employer or client. In the final analysis, the ultimate obligation of accounting professionals is to meet their public interest responsibilities. Fairness in accounting can be equated with objectivity. Objectivity means the financial and accounting information needs to presented free from bias, that is, consistent with the evidence and not based solely on one’s opinion about the proper accounting treatment. CaringThe essence of caring is empathy. Empathy is the ability to understand, be sensitive to, and care about the feelings of others. Caring and empathy support each other and enable a person to put herself in the position of another. Citizenship As citizens of a community, accountants and auditors should strive to enhance the reputation of the accounting profession. One builds “reputational capital” through favorable actions informed by ethical behavior. 4. Modern Moral Philosophies Moral philosophies present guidelines for “determining how conflicts in human interests are to be settled for optimizing mutual benefit of people living together in groups.” Notably, moral philosophies have been used to defend a particular type of economic system and individuals’ behavior within these systems. Moral philosophies provide specific principles and rules that we can use to decide what is right or wrong in specific instances. They can help a business decision maker formulate strategies to deal with ethical dilemmas and resolve them in a morally appropriate way. Most applicable to the study of accounting ethics, including teleology, deontology, justice, and virtue ethics. Two important teleological philosophies that typically guide decision making in individual business decisions are egoism and utilitarianism. 5. The Public Interest in Accounting Accounting profession’s public interest focus is a crucial first step in recapturing the public trust and securing the profession’s future. Regulation of the Accounting Profession Effective regulation is predicated on serving the interests of those who are the beneficiaries of professional accounting services. To meet the public interest, regulation must be objectively determined, transparent, and implemented fairly and consistently. The benefits of regulation to the economy and society should outweigh the costs of that regulation. 6. AICPA Code of Conduct The Principles include (1) Responsibilities, (2) The Public Interest, (3) Integrity, (4) Objectivity and Independence, (5) Due Care, and (6) Scope and Nature of Services As a principle of CPA conduct, integrity recognizes that the public trust is served by (1) being honest and candid within the constraints of client confidentiality, (2) not subordinating the public trust to personal gain and advantage, (3) observing both the form and spirit of technical and ethical standards, and (4) observing the principles of objectivity and independence and of due care. Independence is required both in fact and in appearance. Because it is difficult to determine independence in fact inasmuch as it involves identifying a mindset, CPAs should avoid relationships with a client entity that may be seen as impairing objective judgment by a “reasonable” observer. The due care standard (diligence) calls for continued improvement in the level of competency and quality of services by (1) performing professional services to the best of one’s abilities, (2) carrying out professional responsibilities with concern for the best interests of those for whom the services are performed, (3) carrying out those responsibilities in accordance with the public interest, (4) following relevant technical and ethical standards, and (5) properly planning and supervising engagements. A key element of due care is professional skepticism, which means to have a questioning mind and critical assessment of audit evidence. Virtue, Character, and CPA Obligations Traits of character such as honesty, integrity, and trustworthiness enable a person to act with virtue and apply the moral point of view. To act ethically means to incorporate ethical values into decision making and to reflect on the rightness or wrongness of alternative courses of action. The core values of integrity, objectivity, and independence; attitudes for exercising professional skepticism; and a framework for ethical reasoning all underlie virtuebased decision making in accounting.
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