Seven Signs of Ethical Collapse
1. Pressures to maintain numbers
2. Fear + silence
3. Young 'uns and a Bigger than life CEOS (loyalty to the board)
4. Weak board of directors
5. Conflicts of interest overlooked or unaddressed
6. Innovation like no other company
7. Goodness in some areas
Corporate Culture
Corporate culture is the shared beliefs of top managers in a company about how they should manage themselves and other employees and how they conduct their business.
An important element of ethical culture is the tone at the top. Tone at the top refers to
Characteristics of ethical behavior in leaders include
1. Compassion
2. Courage
3. Diligence
4. Fairness
5. Honesty
6. Inclusiveness
7. Initiative
8. Integrity
9. Optimism
10. Respect
11. Responsibility
12. Trustworthiness
Fraud
Fraud can be defined as a deliberate misrepresentation to gain an advantage over another party
Fraud comes in many different forms, including (How is fraud manifested in accounting?):
1. Fraud in financial statements
2. Misappropriation of assets
3. Subse
Fraud Triangle
Three conditions are present when fraud occurs.
Pressure/incentive - it typically occurs as a result of immediate pressure within wither her internal or external environment
Opportunity - the opportunity to commit fraud and conceal it often involves the a
Internal Control Definiton
includes all of the processes and procedures that management puts in place to make sure that its assets are protected and that company activities are conducted in accordance with the organization policies and procedures
The internal control report must include:
Section 404 by SOX, the securities exchange act of 1934 adopted a regulation that public companies have to include in their annual reports a report of management on the company's internal control over financial reporting
The internal control report must i
Financial Statement Fraud
Financial statement fraud occurs because an employee, typically a member of top management, causes a misstatement or mission of material information in the organizations financial reports.
Examples include:
1. Overstating revenues
2. Understating expenses
Corporate Governance Characteristics
1. Accountability
2. Separation of the duties of the CEO and board chair (Oversight)
3. Separate meetings between the audit committee and external auditors strengthen control mechanisms (Control)
Four pillars of Corporate governance:
1. Accountability
2. Fairness
3. Transparency
4. Independence
Corporate Governance Definition
Corporate governance is shaped by internal and external mechanisms, as well as policy interventions through regulations
Internal mechanisms help manage, direct and monitor corporate governance activities to create sustainable stakeholder value
Examples in
Ethical and Legal Responsibilities of Officers and Directors
1. Duty of care - a director or officer should act in a way that is considered to be in the best interests of the corporation.
2. Duty of Loyalty - it requires directors to act in the best interests of the corporation. Loyalty can be defined as faithfulne
COSO Framework
COSO stands for Committee of Sponsoring organization It establishes a framework that defines internal control as a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the
The COSO report states that management should enact five components related to these objectivities as part of the framework:
1. Control environment - sets the tones of an organization
2. Risk assessment - how entity evaluates risk
3. Control activities - are the strategic actions established by management to ensure that its directives are carried out
4. Monitoring - is a proces
Investigations of the Profession: Where were the auditors?
The major themes of these investigations were
1. Whether nonauditing services impair auditor independence
2. The need for management to report on internal controls
3. The importance of developing techniques to prevent and detect fraud
4. The need to stren
Professional skepticism Definition
is an essential attitude that enhances the auditors ability to identify and respond to conditions that may indicate possible misstatements of the financial statements
The public interest in accounting includes
clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of CPAs in carrying out their professional responsibilities.
Whistleblowers Definition
disclosing to others in an organization an action that violates organizational norms or the law
Dodd Frank Definiton
protects whistleblowers that "voluntarily" provide the SEC with "original information" about a violation of federal securities laws that has occurred, is ongoing, or is about to occur
Examples of threats to independence/AICOA
1. Self-review threat - Preparing source documents to generate client financial statements
2. Advocacy threat - Promoting the client's securities as part of an initial public offering or representing a client in U.S. tax court
3. Adverse interest - Commen
Safeguard Definition
Safeguards are controls that eliminate or reduce threats to independence
Examples of Safeguards
1. Safeguards creating by profession, legislation, or regulation - Professional resources, such as hotlines, for consultation on ethical issues
2. Safeguards implemented by the clients - The tone at the top emphasizes the attests client commitment to fair
Section 201 of SOX provides that the following nonattest services may not be performed for attest clients in addition to bookkeeping or other services related to the accounting records or financial statements of the audit client:
1. Financial information system designed and implementation
2. Appraisal or valuation services, fairness opinion, or contribution-in-kind reports
3. Actuarial services
4. Internal audit outsourcing services
5. Management functions or human resources
6. Br