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AC 589 > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

Ethics

A

principles of conduct that
- individuals use in making choices
- guide individuals behavior in situations involving the concepts of right and wrong
(change over time)

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2
Q

Can college students learn ethics?

A

can teach the rules but not change long-term behavior

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3
Q

Is it ethical to implement a production process that is legal, but produces more pollution than a more expensive production process?

A

No?

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4
Q

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?

A

more likely to get promoted if bend the rules

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5
Q

Are ethical considerations different for industry accountants than for other employees?

A

Yes. Accountants have responsibilities to external regulations

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6
Q

Does an individual accountant change his perception of ethics over time?

A

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
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7
Q

Does an individual’s profession influence his ethical reasoning?

A

Yes. An accountant is more likely to think that a questionable accounting situation is ethical than a doctor or a lawyer.

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8
Q

Ethical Issues in Business

A
  • 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)
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9
Q

SOX and Ethics

A
  • firms must disclose whether it has a code of ethics
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10
Q

Components of a Code of Ethics

A
  • how conflicts of interest are handled
  • require full and fair disclosure
  • require legal compliance
  • mechanism for reporting code violations
  • disciplinary actions for code violations
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11
Q

Fraud and Accountants: Definition

A

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
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12
Q

Fraud and Accountants: 2 Types of Fraud

A
  • 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)
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13
Q

The Fraud Triangle

A
  • 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
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14
Q

Fraud and Accountants: Red Flags

A
  • 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
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15
Q

Relationship to Fraud: Employee Position, Number of Perpetrators, Education Level

A
  • 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)
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16
Q

Problems Contributing to Fraud

A
  • 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)
17
Q

SOX and Fraud

A
  • 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
18
Q

Fraud Schemes

A
  • 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)
19
Q

Fraud Schemes and Losses

A
  • fraudulent financial reporting - most expensive, least % of frauds
  • asset misappropriation - least expensive, most % of frauds
20
Q

Risk Factors of Fraud Schemes

A
  • Fraudulent financial reporting - management tone at the top; industry conditions; financial stability
  • misappropriation of assets - susceptibility of assets; adequacy of controls
21
Q

Fraud Detection Techniques: Payments to Fictitious Vendors

A
  • 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)
22
Q

Fraud Detection Techniques: Payroll Fraud

A
  • 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 #)
23
Q

Fraud Detection Techniques: Lapping

A
  • 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

AC 589 (3 decks)

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