Chapter 12 Flashcards
Ethics
principles of conduct that
- individuals use in making choices
- guide individuals behavior in situations involving the concepts of right and wrong
(change over time)
Can college students learn ethics?
can teach the rules but not change long-term behavior
Is it ethical to implement a production process that is legal, but produces more pollution than a more expensive production process?
No?
Is an industry accountant more likely to get promoted by consistently applying stringent accountant standards or by bending accounting standards on occasion to meet earnings targets?
more likely to get promoted if bend the rules
Are ethical considerations different for industry accountants than for other employees?
Yes. Accountants have responsibilities to external regulations
Does an individual accountant change his perception of ethics over time?
Yes. Age and experience have an effect. A more experienced accountant will be more likely to to fudge numbers
- numb, buy into it
- understand that the consequences are not as harsh
- in beginning, ACs are worried about breaking rules
Does an individual’s profession influence his ethical reasoning?
Yes. An accountant is more likely to think that a questionable accounting situation is ethical than a doctor or a lawyer.
Ethical Issues in Business
- equity (executive compensation, product prices)
- rights (due process, harassment, equal opportunity)
- honesty (accurate financial reporting, misleading advertising)
- exercise of corporate power (workplace safety, environmental issues, downsizing)
SOX and Ethics
- firms must disclose whether it has a code of ethics
Components of a Code of Ethics
- how conflicts of interest are handled
- require full and fair disclosure
- require legal compliance
- mechanism for reporting code violations
- disciplinary actions for code violations
Fraud and Accountants: Definition
Must meet the following conditions
- false representation or non-disclosure
- the deception must be material in inducing someone to act
- there must be an intent to deceive
- injury or loss must have occurred
- injured party must have relied on the deception
Fraud and Accountants: 2 Types of Fraud
- employee fraud (steal assets, misappropriation of assets)
- management fraud (more dangerous - high level managers can avoid controls; can involve fraudulent financial reporting; misappropriation of assets can be larger in magnitude, involve complex transactions, and work with related third parties)
The Fraud Triangle
- situational pressure (incentive) - stress that induces a dishonest act (financial problems)
- opportunity - access to assets possibly combined with poor controls
- ethics (rationalization) - a person’s moral character
Fraud and Accountants: Red Flags
- employee with high debt, gambling problems, drug or alcohol problems
- employee living beyond means
- employee with questionable ethics
- employee closely tied to suppliers
- company in a poor performing industry
- company using several banks
- high employee turnover
- one or two people control the company
Relationship to Fraud: Employee Position, Number of Perpetrators, Education Level
- higher level employees commit the least % of fraud but at the highest average loss
- more than one perpetrator leads to greater loss
- higher education level leads to higher average loss (because higher level employee)
Problems Contributing to Fraud
- lack of auditor independence (Enron consulting fees to AA)
- lack of director independence (director who works for a major supplier)
- compensation schemes (accruals before stock option exercise)
- inappropriate accounting (Enron used SPEs to hide Ls; WorldCom capitalized expenses)
SOX and Fraud
- PCAOB - oversee audit firms
- auditor independence - restrict non-audit services
- corporate governance responsibility - at least 75% independent directors; audit committee (members must be independent and at least one financial expert)
- management disclosure - take responsibility for IC; assess effectiveness of IC; CEO and CFO must certify financials
- new criminal penalties for fraud
Fraud Schemes
- fraudulent financial statements
- corruption (bribery; illegal gratuities - kickbacks; conflicts of interest - employee purchases from a vendor they own; extortion)
- asset misappropriation (steal cash - skimming, lapping; steal inventory; billing schemes - pass-through vendor; payroll fraud - ghost employee; fictitious expense reimbursements)
Fraud Schemes and Losses
- fraudulent financial reporting - most expensive, least % of frauds
- asset misappropriation - least expensive, most % of frauds
Risk Factors of Fraud Schemes
- Fraudulent financial reporting - management tone at the top; industry conditions; financial stability
- misappropriation of assets - susceptibility of assets; adequacy of controls
Fraud Detection Techniques: Payments to Fictitious Vendors
- sequential invoice numbers (use ACL to sort by vendor # and invoice #)
- vendor with employee address (use ACL to join employee and vendor addresses)
- companies with the same address (use ACL duplicates command)
- vendors with many invoices just below review threshold (use ACL stratify command to look for groupings around the threshold)
Fraud Detection Techniques: Payroll Fraud
- excessive hours worked (use ACL analyze statistics to identify excessive hours worked)
- duplicate checks to an employee (use ACL duplicates function to look for 2 checks in 1 pay period to same employee# or 2 checks in 1 pay period to same social security #)
Fraud Detection Techniques: Lapping
- balance forward method - invoices combined at end of month; hard to detect
- open invoice method - invoices billed separately (use ACL to look for amounts that are less than the amount due; create a calculated field for amount carried forward and use ACL duplicates function to look for amounts carried forward that repeat in successive amounts
