ACCT 5198/6098–Accounting Ethics-Exam Review 2
ACCT 5198/6098–Accounting Ethics-Exam Review 2 ACCT 6098
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This 15 page Study Guide was uploaded by Doris.Shaw on Saturday October 1, 2016. The Study Guide belongs to ACCT 6098 at University of Cincinnati taught by Pr. Larson in Fall 2016. Since its upload, it has received 36 views. For similar materials see Accounting Ethics in Accounting at University of Cincinnati.
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Date Created: 10/01/16
Examination 2 Review (Text Ch. 2 & 3;) Focus: eview things the Professor emphasized in class. What the professor thinks is important in the text. Chapter 2→ Targets: “know the discussion about Kohlberg and Rest extremely well’’ 2-1 Kohlberg’s stages of moral development. Function: 1. Provides a framework that can be used to consider the effects of conflict areas on ethical reasoning in accounting. 2. Be helpful in understanding how individuals may internalize moral standards and, as they become more sophisticated in their use, apply them more critically to resolve ethical conflicts. Limitation: ● People need to continue to change their decision priorities over time and with additional education and experience. They may experience a change in values and ethical behavior. Controversy: ● Not everyone agrees, maybe useful. Level 3- not having very strong perspective ● The theory applies more to societal issues than to individual ethical decisions. 3 Levels, 6 Stages: ● Personal interest; Maintaining norms, and Postconventional→ go through progressing ● An auditor who reasons at Stage 3 might go along with the demands of a client out of loyalty or because she thinks the company will benefit by such inaction. ● At Stage 4, the auditor places the needs of society and abiding by the law (GAAP) above all else. ● An auditor who reasons at Stage 5 would not want to violate the public interest principle embedded in the profession’s ethical standards, which values the public trust above all else. ● Investors and creditors have a right to know about the uncertainty surrounding collectibility of the receivables. Stage 6 creates an objective standard for determining the right decision. The application of virtues such as objectivity and integrity enables an auditor to carry out the ethical action and act in a responsible manner. 4 key constituent groups-ethical domain for accountants and auditors: (1) the client organization that hires and pays for accounting services; (2) the accounting firm that employs the practitioner, (3) the accounting profession, SEC, PCAOB (4) the general public who rely on presentations of the practitioner. Responsibilities to each of these groups may conflict. Rest’s Four-Component Model Rest built on Kohlberg’s work → Focuses on the maintaining norms (similar to the conventional level) and postconventional schemas Presumption: an individual’s behavior is related to level of moral development. Four-component model of the ethical decision-making process: 1. Moral Sensitivity (recognition) – ability to identify what is moral & amoral. 2. Moral Judgment – ability to reason through several courses of actions & making right decision when faced with ethical dilemma. Think throughout 3. Moral Motivation(focus) – influences affecting an individual’s willingness to place ethical values ahead of non-ethical values. What you should do? Pick up the right one. 4. Moral Character – having one’s ethical intentions match actions taken.Take action. New Added: Moral Intensity→ links to Rest’s Model Magnitude of Consequences – degree of harm/benefit [Greater degree → increase in moral intensity] Temporal Immediacy – time between act & consequences Social Consensus – degree of group agreement of good/bad Proximity – nearness of decision maker to those affected Probability of Effect – likelihood will occur Concentration of Effect - # affected & magnitude of harm Thorne develops Rest’s components. Her model relies on virtue-based characteristics, which tend to increase the decision maker’s propensity to exercise sound ethical judgment. ● Common Point (Thorne and Rest), in 3 ways. 1) both perspectives suggest that ethical action is the result of a rational decision-making process. 2) both perspectives are concerned with an individual’s ethical decision-making process. 3) both perspectives acknowledge the critical role of cognition in individuals’ ethical decision making. Apply the steps in the Integrated Ethical Decision-Making Model to a case study. Professor underlined that this chat is very well summarized the model: Behavioral Ethics 2 modes of decision making: System 2 is more logical. System 1: intuitive system of processing info; fast, automatic, effortless, & emotional decision processes System 2: thinking is slower, conscious, effortful, explicit, & a more reasoned decision process How we think we should behave is different from how we decide to behave. → Problem: Cognitive Dissonance - Only occurs when we are “attached” to our attitudes & beliefs. Giving Voice to Values - Behavioral ethics approach emphasizing development of capacity to effectively express one’s values in a way that positively influences others - Requires role-taking ability Think how best to counteract these “reasons & rationalizations” --Loyalty, materiality, isolated incident, student graduating Think about arguments others might make that create barriers to expressing one’s values in workplace Key: What’s at stake for key parties? --Reputation, leadership stake, faculty advisor & community Case: Case 2-1 A Team Player? (a GVV case) Related to the Kohlberg’s Stages Case 2-4 A Faulty Budget (a GVV Case) No legal issues here. Related to “reasons & rationalizations” Case 2-9 Phar-Mor and Case 2-10 WorldCom Against SEC standards and Fraud Related to the Integrated Ethical Decision-Making Model Chapter 3→ Targets: Corporate Governance & whistleblowing Organizational ethical climate: A critical component of creating an ethical organization environment is the culture - Includes shared values, beliefs, goals, norms, and problem solving mechanisms. The ethical climate of an organization plays an important role in organizational culture. - Level of ethics practiced within a company; Determined by leaders - An important element of ethical culture is the tone at the top. - Tone at the top refers to the ethical environment that is created in the workplace by the organization’s leadership. An ethical tone creates the basis for standards of behavior that become part of the code of ethics Johnson: an organization must: 1. First identify principles and practices that characterize positive ethical climates 2. Then adapt them to a particular organization setting. Key Markers of Highly Ethical Organizations: - including humility, zero tolerance for individual and collective destructive behaviors, justice, integrity, trust, a focus on process, structural reinforcement, and social responsibility. ** Having basic level of trust Framework for Understanding Ethical Decision Making in Business 1. Ethical Issue Intensity ● first step: recognizing that an ethical issue exists. ● Importance of issue to individual, work group &/or organization (intensity) based on values, beliefs & norms involved & pressures in workplace. 2. Individual Factors ● Values of individuals; Org & social forces shape behavioral intentions & decision making 3. Organizational Factors ● Org’s values have a greater influence than a person’s own values. 4. Opportunity ● Conditions that limit or permit ethical or unethical behavior 5. Business Ethics Intentions, Behavior, & Evaluations ● Organizational ethical culture shaped by effective leadership Ethical Dissonance Model Interaction between individual & org based upon ethical fits of relationship in 4 potential ethical fit scenarios/options: 1: high-high (high org & high individual ethics) 2: low-low (low org & low individual ethics) 3: high-low (high org & low individual ethics) 4: low-high (low org & high individual ethics) **Ethical Dissonance only exists in #3 & #4 – in which case person usually leaves organization 7 Signs of Ethical Collapse (1) pressure to maintain numbers; (2) fear and silence; (3) young ’uns and a bigger than-life CEO (i.e., loyalty to the boss); (4) weak board of directors; (5) conflicts of interest overlooked or unaddressed; (6) innovation like no other company; and (7) goodness in some areas atones for evil in Others. 1) Pressure to Maintain Numbers Ethical collapse occurs when there is an unreasonable & unrealistic obsession with meeting quantitative goals “financial results at all costs” [Enron, WorldCom] 2) Fear of Reprisals Employees reluctant to raise issues of ethical concern because they may be ignored, treated badly, transferred or worse: “kill the messenger syndrome” 3) Loyalty to Boss Young people selected by CEO for positions based on inexperience, possible conflicts of interest, & unlikelihood to question CEO’s decisions [ex. Tyco, Dennis Kozlowski, Lavish Spending] 4) Weak Board of Directors (Big issue) Weak Board of Directors characterizes virtually all companies with major accounting frauds in early part of 2000s [ex. HealthSouth, Richard Scrushy] ● Stakeholder Perspective - Stakeholder management requires that an individual consider issues from a variety of perspectives other than one’s own or that of the organization - stakeholder orientation: the degree to which an organization understands and addresses stakeholder demands - 3 sets of activities 1. Generating data about stakeholder groups & assessing firm’s effects on these groups 2. Distributing this information throughout firm 3. Responsiveness of entire org to information The Case of the Ford Pinto: a classic example of how a company can make a fatal mistake in its decision making by failing to consider the interests of the stakeholders adequately. The failure was due to total reliance on utilitarian thinking instead of the universality perspective of rights theory, to the detriment of the driving public and society in general. 7) Community Involvement Offsets Bad Be skeptical about: ‘Doing well by doing good’ Solution: Rely on virtues: truth, honesty, fairness, & egalitarianism [Ex.: Adelphia, John Rigas, Treated as personal piggy bank] A difference between Business vs. Personal Ethics 1. Business Ethics: Comprise principles, values, & standards that guide behavior in business.Ethical standards for accounting profession embodied in its codes of conduct 2. Personal Ethics: Follow the Golden Rule at all times & ask, “How would I like to be treated in a particular situation?” Many people seem to have different ethics in workplace & home Trust in business ● is cornerstone of relationships with customers, suppliers, employees & others who have dealings with an organization ● Trust means to be reliable & carry through words with deeds. ● Trust becomes pervasive only if org’s values are followed & supported by top management. ● Trust can be lost, even if once gained in the eyes of the public, if an org no longer follows the guiding principles that helped to create its reputation for trust. Ethics in the Workplace (System 2) Code of conduct - A code goes beyond what is legal & provides normative guidelines for ethical conduct. Support for ethical behavior from top mgmt is critical for fostering an ethical climate. ● How managers can set ethical tone at the top: 1. Consider how your actions affect others. 2. Do no harm. 3. Make decisions that are universal. 4. Reflect before deciding. Integrity: The Basis for Trust in the Workplace People of integrity are self-driven to do right thing. While misconduct down overall, a relatively high & of misconduct committed by managers. Fraud in Organizations - Describe the causes of fraud, detection methods, and preventative controls. 1. Fraud - deliberate misrepresentation to gain advantage over another party 2. Occupational fraud - use of one’s position within org to misappropriate org’s resources or assets for personal gain ● More likely detected by tip, using hotlines, than any other way ● Asset misappropriation schemes most common type ● Proactive fraud prevention & detection controls vital part in managing risk of fraud Frequency of Anti-Fraud Controls External audit of financial statements - 82% Code of conduct - 77% Internal audit department - 71% Mgmt certification of financial statements - 70% External audit of internal controls - 66% Management review - 63% Independent audit committee - 62% Behavioral Indicators of Fraud Living Beyond Means (classic one) 43.8% Financial Difficulties (always have related) -health issues 33.0% These warning signs should alert internal auditors that trouble may lie ahead with respect to actual fraud. Internal Control Weaknesses - Internal control includes all of the processes and procedures that management puts in place to help make sure that its assets are protected and that company activities are conducted in accordance with the organization's policies and procedures Effective system - critical to establish an ethical corporate culture supported by the tone at the top. ● Internal control systems - no matter how well conceived & operated, only provide reasonable - not absolute – assurance to mgmt & board of directors regarding achievement of an entity’s objectives. Mgmt overriding internal controls may happen. Financial Statement Fraud Because an employee – usually top mgmt – causes a misstatement or omission of material information in orgs’ financial reports. ● Methods include: 1. Revenue Overstatement 2. Expenses Understatement 3. Improper Asset Valuations Why does Financial Statement Fraud Occur? 1. Situational pressure 2. Perceived opportunity 3. Rationalization A culture is created & tone at the top established that presents image of a company willing to do whatever it takes to paint a rosy picture about financial results. **Effective Corporate Governance Systems - Corporate governance systems establish control mechanisms to ensure org values guide decision-making & ethical standards followed. 4 pillars: Accountability, Fairness, Transparency, & Independence. Definition: Giving overall direction to the enterprise, with overseeing and controlling the executive actions of management, and with satisfying legitimate expectations of accountability and regulation by interests beyond the corporate boundaries. Characteristics: ccountability, Oversight, & Control ● Define the relationship between: stakeholders, management, and board of directors of a company → influence how that company is operating. → most basic level, deals with issues that result from the separation of ownership and control. Importance of Good Governance 1. Better access to capital 2. Aids economic growth 3. Positive impact on stock prices 4. Ensures that business is fair & transparent 5. Ensures that companies can be held accountable 6. Leads to sustainability 7. Consequences of Weak Governance Governance Mechanisms Internal (manage, direct, & monitor corp governance activities to create sustainable stakeholder value) 1. Independent directors 2. Audit committee 3. Management 4. Internal controls 5. Internal audit External (monitor company’s activities, affairs, & performance to ensure proper actions by insiders) 1. Financial markets 2. State & federal laws & regulations 3. Court decisions 4. Shareholder proposals Best Practices of Governance 1. Independent directors enhance governance accountability 2. Separate duties of CEO & board chair 3. Separate meetings between audit committee & external auditors strengthen control mechanisms Agency Theory Relationship: managers & directors = agents ; Shareholders = the principal The principal-agent relationship involves a transfer of trust and duty to the agent - Assuming that the agent is opportunistic and will pursue interests that are in conflict with those of the principal, thereby creating an “agency problem.” Thus, corporate governance mechanisms are needed to align investor and management interests. Agency Problem Desires & goals of agents & principals may not be the same Agents likely to place personal goals ahead of corporate goals ● Results in conflict of interests between agents & principals → whole idea is conflicts of the self-interest. Difficult to verify activities of agents Agency costs arise 1. An “information asymmetry” between the corporation and outsiders - Because insiders (the corporation) know more about a company and its future prospects than do outsiders (investors). 1. Occur if the board of directors fails to exercise due care in its oversight role of management. Overcoming Agency Problem - The agency problem can never be perfectly solved, and shareholders may experience a loss of wealth due to divergent behavior of managers. Solutions: If primary or sole goal of org is to make money, then use things like: Executive compensation Controlling management through Board of Directors’ actions Accounting system as monitoring device (Internal control; Disclosure) Audited financial statements An alternative to agency theory is stewardship theory. - Managers are stewards: focus on business itself (best interests of “the company,”), not the shareholder Approaches to the agency problem - Executive Compensation (most common) -link managerial compensation to corporation financial performance & stock price performance Purpose: to encourage managers to maximize the market value of shares. Problems: 1. Ratio of U.S. CEO to lowest employee salary (344 to 1) 2. Manipulation of earnings (Excessive Pay Packages) 3. Backdating of stock options (scandal broke in 2006) 4. Clawbacks: SOX gave ability to clawbacks compensation & stock profits of CEOs & CFOs in financial restatements caused by misconduct 5. “Say on Pay” SEC firms must every 3 years have a nonbinding yes/no vote on executive compensation Ethical and Legal Responsibilities of Officers and Directors Directors and officers are deemed fiduciaries of the corporation because their relationship with the corporation and its shareholders is one of trust and confidence. These fiduciary duties include: Duty of care - act in good faith, exercise care that an ordinarily prudent person would exercise in a similar situation Duty of loyalty - act in best interest of corporation; loyalty can be defined as faithfulness to one’s obligations and duties Duty of Good Faith - requires an honesty of purpose that leads to caring for the well-being of the constituents of the fiduciary. Business Judgment Rule - Directors and officers are expected to exercise due care and to use their best judgment in guiding corporate management, but they are not insurers of business success. Honest mistakes of judgment and poor business decisions on their part do not make them liable to the corporation for resulting damages. Audit Committee Independent directors - with one having financial expertise Oversight of financial reporting Internal audit function External auditors CEO & CFO financial statement certification process Seen as a body that should be able to prevent identified fraudulent financial reporting Committee should meet separately with senior executives, internal auditors, & external auditors Whistleblowing Definition: Employees (former or current) who report suspected violations 4 elements of the whistleblowing process: 1. Whistleblower 2. Whistleblowing act/complaint 3. Party to whom complaint is made 4. organization involved with the complaint Whistleblower laws protects employees who provide fraud information from retaliation. → anti-retaliation provisions of both SOX and odd-Frank. Case: R. Allen Stanford ponzi scheme, 2003 whistleblower ignored, $7 Billion fraud by 2012 Dodd-Frank Act ● Whistleblower CANNOT be one who already gave the information to govt., self-regulatory org, or PCAOB ● Dodd-Frank Whistleblowing sets aside confidentiality requirement ● Protection from being fired; including reinstatement, double back pay, & special damages ● Whistleblowers only r eporting internally not protected ● One major concern: it may cause would-be whistleblowers to go external with the information rather than internal using the organization’s prescribed reporting mechanisms Accountant Restrictions Excludes 2 groups of accountants because of their pre-existing legal duty to report securities violations: 1. Individuals with internal compliance or audit responsibilities at an entity, including CPAs 2. CPAs getting knowledge of potential violations via an audit required by federal securities laws But CPAs may report potential violations of own firm's’ performance of audit services of client AICPA Code of Professional Conduct had encouraged CPAs not to divulge client confidential information unless a valid court order or subpoena exist. → Don't report things you are not sure. Confidentiality[ Bottom line: Fix things] Does obeying Dodd-Frank & other SEC laws conflict - with Rule 301 of AICPA Code of Prof. Conduct? ● Rule 301 now says confidentiality obligation does not prohibit compliance with applicable laws & government regulations - with IMA Code of Ethics? ● IMA Code of Ethics says confidential employer information should be kept confidential except when disclosure is authorized or legally required Morality of Whistleblowing ● Company's policies should be designed to encourage moral autonomy, individual responsibility, & org support for whistleblowers ● Moral agency is important for determination of moral behavior ● If pressure exists in org not to report wrongdoing, a rational, moral person should withstand such pressure - even with perceived retaliation - because it is a moral requirement to do so Rights & Duties ● Whistleblowers hope & believe their speaking out will help fix what they perceive as org wrongdoing ● “Retaliatory climate” in org is primary barrier to blowing the whistle on corp wrongdoing ● When orgs establish an ethical culture and anonymous channels to report wrongdoing, it creates an environment that supports whistleblowing while controlling for possible retaliation Internal Accountants’ Eligibility Internal accountants, including compliance & internal auditors, cannot get whistleblower $ under Dodd-Frank because of their legal duty & job responsibility to report suspicion of illegal acts/fraud to mgmt, UNLESS: ● Disclosure to SECs needed to prevent “substantial injury” to finl interest of entity or its investors ● Whistleblower “reasonably believes” entity impeding investigation of misconduct (e.g., destroying evidence/improperly influencing witnesses) ● Whistleblower first reported violation internally & at least 120 days passed with no action. Whistleblowing Experiences Whistleblowing program right thing to protect public interest, but concerns are: 1. Self-interested/opportunistic people may be induced to reveal corp data to SEC, with few safeguards about information quality 2. Permitting compliance officers to be whistleblowers solely on passage of time can erode corp culture & trust in compliance officials who may subvert objectives of preventing, detecting, & remediating corp misconduct on an enterprise-wide basis
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