Chapter 3 Flashcards
What is a critical component of creating an ethical organization environment?
Is the culture that includes shared values, beliefs, goals, norms and problem solving mechanisms
What is an organizational ethical climate?
Refers to moral atmosphere of the work encvironment and the level of ethics practiced within a company
An ethical climate is enhanced through?
Values driven organization that encourages openness and transparency and provides a supportive environment to voice matters of concern without fear of retribution or retaliation
What has a greater influence on decisions?
Organization values
Organizational ethical culture is shaped by?
Effective leadership
Jones hiltebeital model looks at what?
The role of ones personal code of conduct in ethical behavior within an organization
What is the ethical dissonance model?
It illustrates the interaction between individuals and the organization based on person organization ethical fit at various stages of the relationship in each potential ethical fit scenario
There are four ethical fit options, what are they?
HIGH HIGH - organizational and individual ethics
LOW LOW - two possess low person organization
HIGH LOW - high .org and low individual
LOW HIGH - low .org and high individual ethics
What is an ethical collapse?
It occurs when any organization has drifted from the principles of right and wrong and uses financial reporting standards and rules as one area that it may occur
What are the seven signs of ethical collapse?
1) pressure to maintain #
2) fear and silence
3) young un and bigger than life CEO (loyalty to boss)
4) weak BOD
5) conflicts of interest overlooked and unaddressed
6) innovation like no other company
7) goodness in some areas atones for evil in others
What is a important element of ethical culture?
Tone at the top
What does tone at the top mean?
Refers to the ethical environment that is created in the workplace by the organizations leadership.
What creates the basis for standards of behavior that become part of code of ethics?
Ethical tone
What is the cornerstone of relationships with customers, suppliers, employees and others who have dealings with an organization?
Trust
Trust means?
To be reliable and carry through words with deeds
Code of conduct in a workplace influences?
The development of the ethical culture in the workplace
What are the list of measures that should be taken to establish an ethical culture?
1) establish clear policies on ethical conduct including code of ethics
2) develop ethics training program that instills a commitment to act ethically and explains code of provisions
3) assign a top level office to oversee compliance with ethics policies
4) use internal auditors to investigate whether ethics policies have been followed in practice
5) establish strong internal controls to prevent and detect unethical behaviors such as fraud
6) establish whistleblowing policies including reporting outlets
7) establish an ethics hotline where employees can discuss questionable behavior on an anonymous basis
8) have employees sign a statement that they have complied with ethics policies
9) enforce ethics policies fairly and take immediate action against those who violate the policies
10) reward ethical behavior by including It in the performance evaluation system
Managers can set right tone at the to and foster ethical leadership by following 4 rules. What are these rules?
1) consider how your actions affect others
2) do no harm
3) make decisions that are universal
4) reflect before deciding
What is fraud?
Defined as deliberate misrepresentation to gain an advantage over another party
What is occupational fraud?
Employee abuses the trust placed in him by an employer for personal gain
ACFE study found that most occupational fraudsters crimes are motivated by what?
Some kind of financial pressure
What are some behavioral indicators of fraud?
1) living beyond means
2) financial difficulties
3) unusually close association with vendor/customer
4) control issues / unwillingly to share duties
5) wheeler dealer attitude
6) divorce/family problems
7) instability, suspiciousness or defensiveness
8) addiction problems
9) complained about inadequate pay
10) past employment related problems
11) refusal to take vacations
12) excessive pressure within org
13) social isolation
14) complained about lack of authority
15) excessive family/ peer pressure for success
16) instability in life circumstance
Internal controls 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 organizations policies and procedures.
Why is an effective system of IC is critical?
It is critical to establish an ethical corporate culture that should be supported by the tone at the top
An internal control report must include what?
1) statement of managements responsibility for establishing and maintaining IC
2) managements assessment of the effectiveness of the company’s internal control over financial reporting as of the end of company’s most recent year
3) statement that identified the framework used by mgmt to evaluate the effectiveness of the company’s IC over financial reporting
4) statement that registered public accounting firm audited the company’s FS
An internal control system can provide absolute assurance to management and BOD regarding achievement of entity’s it objectives.
T OR F
F
It can provide reasonable not absolute assurance
Why do financial statement fraud schemes occur?
It is because an employee who is typically a member of top management causes a misstatement or omission of material information in the organizations financial reports
Common methods for overstating revenues include
Recording gross rather than net revenue
Recording revenues of other companies and acting as a middle man
Recording sales that never took place
Recording future sales in current period
Recording sales of products that are out on consignment
Common methods of understatement expenses include
Reporting cost of sales as a non operating expense so that it does not negatively affect gross margin
Capitalizing operating costs, recording them as assets on the balance sheet instead of as expenses on the income statement
Not recording some expenses at all or not recording them in proper period
Methods of improper asset valuations include
Manipulating services
Changing useful lives of assets
Failing to take a write down when needed
Manipulating estimates of FMV
What are three factors that are the reason for FS fraud to occur. WhT are those three factors?
1) situational pressure
— typically occurs as a result of immediate pressure within her internal or external environment
— feel pressure to meet amounts/goals
2) perceived opportunity
— they do fraud because they believe they can get away with it
— opportunities to commit fraud is due to the lack of proper oversight, weak IC,
3) rationalization
— justify act
— convince thyself that it is just temporary or acceptable
Financial statement fraud is enabled by what?
The absence of an ethical culture
What are the four pillars of corporate governance?
1) accountability
2) fairness
3) transparency
4) independence
What is corporate governance?
No set accepted definition
But it is seen as separation of ownership and control in corporations
Corporate governance regime typically includes what?
Mechanisms to ensure that the agent (mgmt) runs the firm for the benefit of one or more principals
Mechanisms include both internal and external.
Internal: ?
External: ?
Internal mechanisms
— direct and monitor corporate activities to create SH value
External Mechanisms
— monitor firms activities affairs and performance to insure that the interests of insiders are aligned with interests of outsiders
What strengthens control mechanisms between the audit committee and external auditors?
1) independent directors enhance governance accountability
2) SOD of the CEO and board chair
3) separate meetings
Ethical and legal responsibilities of officers and directors include
- Duty of care — manager and directors
— act in good faith, exercise care and act in a way that is considered in best interests of corporations
- Duty of loyalty
—requires directors to act in best interest of corporations
- Duty of good faith
— requires honesty of purpose which leads to caring for well being of constituents
- Business judgement rule
— expected to exercise care and use their best judgement in guiding corporate mgmt
What is the relationship between audit committee, internal auditors and external auditors?
Audit committee
—has oversight responsibilities for FS
INTERNAL AUDITOR
— have direct and unrestricted access to audit committee so they can take matters of concern directly to that group without having to go through top mgmt
EXTERNAL
—rely on support and actions of the audit committee to resolve differences with mgmt over financial reporting
What is the goal of the relationships between committee, internal and external auditors?
To establish an ethical corporate culture that supports good corporate governance
Audit committee
— completely independent of mgmt and include at least 3 members which one of them should have financial expertise
The audit committee duties include?
1) monitor integrity of FS
2) review announcements relating to company’s financial performance
3) review significant financial reporting judgements
4) review company’s IC and risk procedures
5) monitor effectiveness of company’s internal audit function
6) review company’s whistleblower processes and compliance program
7) review and monitor the external auditors independence and objectivity and effective as of audit process
Internal auditors interact with who?
Top management
Internal auditors should assist top management with?
— Developing accurate and reliable FS
— Ensure effectiveness of IC
— Monitor compliance with laws and regulations
External auditors have an obligation to whom?
To the public interest that underlines their corporate governance responsibilities
What is the primary role of external auditors in corporate governance?
Protect interest of SH
What is an integral part of audit process?
Effective two way communication between audit committees and external auditors
Internal controls established by management should do what?
Help prevent fraud
Internal controls are to prevent fraud such as?
— including materially false and misleading financial reports
— asset misappropriations
— inadequate disclosures in FS
Internal controls are designed to ensure what is followed?
Management policies
What is the COSO Framework?
It defines internal control as a process and it is effected by BOD, mgmt and other personnel
COSO FRAMEWork is designed to provide reasonable assurance regarding to the achievement of the following objectives:
1) effectiveness and efficiency of operations
2) reliability of financial reporting
3) compliance with applicable laws and regulations
Framework consists of 5 dimensions
- Control environment
- Risk assessment
- Control activities
- Monitoring
- Information and communication
What is the control environment?
Sets tone of organization
What is the foundation for all aspects of internal control, providing disciple and structure?
Control environment
What is risk assessment?
Entity’s identification and evaluation of how risk might affect the achievement of objectives
What are control activities?
Strategic actions established by management to ensure its directives are carried out
What is monitoring?
Process that assesses the efficiency and effectiveness of IC over time
What is information and communication?
Systems that provide information in a form and at a time that enables people to carry out their responsibilities
An organization ethics officer is to do what?
Makes sure the organization is in compliance with laws and regulations
Section 302 requires CEO AND CFO to do what?
Verify that the financial statements have no material misstatements
Jury is still out on whether SOX serves as an adequate deterrent to financial fraud
T OR F
True
What ar ether four elements to whistleblowing?
- Whistleblower
- Whistleblowing act or complaint
- Party to whom the compliant is made
- Organization against which the complaint is lodged
The key to whether an individual will blow the whistle on wrong doing is whether the whistleblower perceived what?
Organizational policies that are designed to encourage
- Moral autonomy
- Individual responsibility
- Organizational support for whistleblowers
What is important for the determination of moral behavior?
Moral agency
What does autonomy mean?
Will means to act according to reasons and motives that are taken as ones own and not the product of an organizational polices and external forces
Internal accountants are excluded from recovering whistleblower awards because of their pre existing legal duty to report securities violations
T OR F
True
Under certain circumstances internal accountants are eligible to become Dodd frank whistblowers in three situations:
- Disclosure to SEC to prevent substantial injury to financial interest of equity or its investors
- Whistleblower reasonably believes the entity is impeding investigation of midconduct
- Whistleblower has first reported violation internally and at least 120 days have passed with no action
External auditor eligibility
Generally prohibited from blowing the whistle on their clients because the information gained during the audit would not be considered to derive from an individuals independent knowledge or analysi
Rule 102 of AICPA Code requires
Member should maintain objectivity and integrity, be free of conflict of interest and should not misrepresent facts
