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Test Bank and Solution Manual

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Business and Professional Ethics

Edition:

9th Edition

Author(s):

Len Brooks Paul Dunn

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Ch01

1. The difference between what the public thinks it is getting in audited financial statements and what the public is actually getting is known as: a. the credibility gap. b. the expectations gap. c. the audit gap. d. the stewardship gap. e. None of the above ANSWER: b

2. Which of the following is not a trend described in Chapter 1 as having an impact on the ethics of business? a. Directors’ legal liability b. Management’s stated intention to protect reputation c. Auditors’ legal liability d. Management’s assertions to shareholders on the adequacy of internal controls e. Management’s stated intention to manage risk ANSWER: c

3. Which corporate report discusses subjects that include environmental, health and safety, philanthropic, and other social impacts? a. A corporate annual report b. A corporate social responsibility report c. A corporate quarterly report d. A corporate stakeholder report e. A corporate ethics committee report ANSWER: b 4. Professional accountants, in their fiduciary role, owe their primary loyalty to:

a. the accounting profession. b. the client. c. the general public. d. government regulations. e. All of the above

ANSWER: c 5. Ethical corporate behavior is expected to lead to:

a. higher profitability in the short term. b. higher profitability in both the short term and the long term. c. lower profitability in the long term. d. higher profitability in the long term. e. lower profitability in both the short term and the long term.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Ch01 6. Examining the interests of stakeholders is probably required for:

a. high short-term profits. b. optimal medium- and longer-term profits. c. continuing support from stakeholder groups. d. effective risk management. e. All of the above

ANSWER: a 7. A value that is almost universally respected by stakeholder groups is:

a. a super norm. b. an alfa norm. c. a value norm. d. a hypernorm. e. a general norm.

ANSWER: d 8. Since the mid-1990s, both management and auditors have become increasingly:

a. profit management oriented. b. ethics oriented. c. value management oriented. d. risk management oriented. e. marketing oriented.

ANSWER: b, d 9. The following are determinants of reputation.

a. Trustworthiness and responsibility b. Credibility, responsibility, and relevance c. Responsibility and impartiality d. Relevance and impartiality e. Relevance, credibility, and responsibility

ANSWER: a 10. The following would be a key control function of a board of directors. a. Set guidance and boundaries b. Appoint the CEO c. Approve the sale of the company’s assets

d. Decide on the company’s auditor e. All of the above ANSWER: e 11. Companies attempt to manage the risk of something happening that will have a negative or positive impact Copyright Cengage Learning. Powered by Cognero.

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Business and Professional Ethics 9th Edition Brooks Dunn Solution Manual

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Chapter 1—Ethics Expectations Chapter Questions and Case Solutions

Chapter Questions..................................................................2 Case Solutions.........................................................................8

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Auditors: continuation of reasonable fee for service arrangements, reasonable audit risk, low possibility of lawsuits and legal settlements, no loss of reputation Management: stable/increasing profits to support their continuance, bonuses and the price of shares or options held Accounting profession: no loss of reputation which could damage their franchise and their ability to maximize their independence and future income Regulators, etc. The conflicts in interest which show up in this listing should be underscored with the

students, because they are at the root of most ethical problems, and they provide a framework for deciding how to best disclose the transactions flowing from the two business arrangements. Discussion of important issues Renegotiation of overdue loans to call them current For this to be substantive rather than just form, the collectability of the loans has to be improved and assured. Repeated renegotiations would imply non-collectability, and should be evident during the course of an audit. The case is silent on the audit work undertaken, but the resignation implies that the auditors had decided the collectability was in serious question. Use of insurance against non-collectability This approach is not new, but the familiarity of the insurer to the nature of risk involved, and the capacity of the insurer to pay off in the event of large losses, would have to be scrutinized carefully. Given the extent of losses being experienced by banks in regard to real estate loans, it is unlikely that any insurer, other than a government, could sustain the payout required. Once again this may be why the auditors decided to resign. Persuasion vs. qualification vs. Resignation Customarily, as in the case, an auditor who believes statements should be changed or unfair presentation will result, will call for a meeting with the management and/or the audit committee of the Board and will ask for proper disclosure to be made. If adequate changes are not made, the auditors can qualify their auditor's report and disclose the reason for doing so. They need not resign. If, however, an auditor loses confidence in the integrity of the management of a client, then resignation at the earliest possible moment is the best way to avoid legal liability, which will probably ensue. However, the auditor must also consider his/her responsibility to the shareholders. If his/her resignation is without notifying the shareholder of the reason, then the auditor's fiduciary duty to the shareholder has not been properly discharged, because the shareholder may never know of the auditor's concern until it is too late. Resignation from an audit without rendering a report or advising the audit committee of the reason is most unusual. Courtesy among auditors/Protection of shareholders and auditor’s interests Codes of conduct for auditors usually provide that incoming auditors contact out-going auditors to advise them of their appointment and whether they had any problems with the client to advise the incoming group about. This would be the opportunity to protect the interests of Business & Professional Ethics for Directors, Executives & Accountants, 9e Leonard J. Brooks and Paul Dunn, ©2021, 2018 Cengage Learning, Inc.

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the shareholders by passing along concerns, and for the incoming auditor to assess whether he/she should take on the job. If this opportunity does not present itself, and in this case it apparently has not, the outgoing auditor, James, should assess whether he should advise Jack of his concerns. I believe he should do so, and follow-up in writing; otherwise, his duty would not be discharged to the shareholders. If this is not done, I believe James would be acting unethically and probably would be open to legal liability, as well. Students should be able to understand more fully the purpose of an auditor and his/her responsibilities as a result of studying this case.

Chapter 2—Ethics & Governance Scandals Chapter Questions and Case Solutions

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The arguments against making the payments are legal (counsel has advised CMI that the payment is illegal) and ethical (a variety of ethical theories can be used). Utilitarianism Utilitarianism contends that the best option is the one that promotes the most happiness for humanity. In this case, not paying the terrorist would promote the most happiness. The National Peoples Liberation Front is involved in murder, rape, torture and the cultivation and exportation of cocaine. These negative societal impacts far outweigh the positive of protecting the CMI workers in Columbia and the profits that accrue to the owners of the mine. So, a utilitarian would argue not to make the payments. Utilitarianism also argues that probable consequences have to be considered. This means that CMI cannot just sell its operations to another company and transfer the problem to the new owner. Presumably the terrorist would extort payments from the new owners, which does not promote the overall happiness of society. So, transferring the problem to another is not an acceptable ethical alternative. Deontology Rather than focusing on consequences, deontology examines the motivation of the decision maker. Two useful rule-questions are: are you prepared to have your decision universalized, and are you treating people as ends or as means? If everyone was prepared to make payments to terrorists and other extortionists, it would contribute to the collapse of society. So, from a deontology perspective, making the payments is unacceptable. Also, it would be unacceptable to sell the mining operations to another, who would then be forced to make the extortion payments. Deontology would not accept the position that it is ethically correct to solve a dilemma by transferring it to another decision maker. CMI has been operating in these countries for over a hundred years. CMI knows the political landscape. It chose, in the early years, to operate in countries in which it knew that extortion and bribes were commonplace. At that time, it made the decision to treat these payments as a means to furthering the financial results of the company. So, the ethicality relates not to the current payments but to all the previous payments the company has been making since the 1870’s. This line of reasoning forces the students to consider the motivation of the company from the beginning of its operations in these Latin American countries. (Instructor note: this is an opportunity to lead a slightly tangential discussion of the current business dilemma of opening branch operations in third world countries.)

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Virtue Ethics Similar to deontology, virtue ethics examines the motivation of the decision maker, rather than the consequences of the decision. Firms are to demonstrate courage, candor, and integrity. Standing up to the terrorists, maybe more foolhardy than courageous. However, the firm may choose to be candid, by disclosing that what is happening in Latin America and that it is making the payments not as ‘security payments’ but rather as ‘extortion payments’. This would allow all interested stakeholders, including the U.S. government, to know where CMI stands, and how it is conducting business abroad. 3. What other options are available to Alec? This question allows the students to use their moral imaginations and come up with creative solutions to this dilemma. For example, from a utilitarian perspective, rather than make the payments to the terrorist, CMI could invest in a defensive force to protect its employees. Although this would probably be much more expensive than the $1.7 million extortion payments, it would provide a greater social benefit than promoting terrorism. From a deontological perspective, perhaps CMI can work with the local governments to enhance the rule of law within these countries. However, this is presumably a very costly option. Are there any others that may be more cost effective? From a virtue ethics perspective, CMI can demonstrate integrity by not making the payments and instead by developing a creative strategy that ensures the security and safety of its operations and personnel. A virtue ethics approach allows students to be imaginative, and not fall into thinking of the false dichotomy of either make the payments or quit Latin America. Additional Information In 1871, Henry Meiggs formed the United Fruit Company. In 1970 it changed its name to United Brands Company and in 1985 to Chiquita Brands International. Often, there have been allegations of questionable business activities. Since its early years of operations, the United Fruit Company was accused of bribing various government officials for preferential treatment. On November 12, 1928 a strike at a United Fruit plant in Columbia was put down with the support of government troops. United Fruit was implicated with the CIA in the overthrow of the democratically elected Guatemalan government of General Guzman in 1954. In 1998 the Cincinnati Enquirer launched a series of subsequently retracted articles on the misdeeds of Chiquita, including pollution, bribery, and complacency in importing cocaine into the United States. From 1997 to 2004, Chiquita admitted that it paid approximately $1.7 million to the United Self-Defense Forces of Columbia (AUC in Spanish), a right-wing paramilitary group. Through its subsidiary, Banadex, Chiquita made more than 100 monthly payments, often in cash, to the AUC, which were recorded as being for security services. As control of the bananagrowing region shifted, Chiquita then made payments to two other terrorist groups, the National Liberation Army (ELN) and the Revolutionary Armed Forces of Columbia (FARC). Chiquita’s board of directors was aware of these payments, and had been advised by legal counsel, in 2003, to stop making the payments. The U.S. State Department had formally designated both Business & Professional Ethics for Directors, Executives & Accountants, 9e Leonard J. Brooks and Paul Dunn, ©2021, 2018 Cengage Learning, Inc.

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10. Smokers Are Good for the Economy – Really (Chapter 4, pages 248-250) What this case has to offer The Smokers are Good case offers the opportunity for students to appreciate that: •

Cost-benefit analyses (CBA) are useful, but they are susceptible to many flaws: o

Prices/costs are hard to find exactly, and rarely are equivalent to the value of specific items or impacts – consequently it is quite possible “to find the price of everything, but the value of nothing” and to be misled.

o Frequently, CBAs do not capture the impact of an action on all stakeholders, particularly those on whom the impact is indirect. •

What is incorporated in a more fulsome ethical analysis. Teaching suggestions I would recommend getting the students involved in the case by asking:

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How many smoke now?

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How many have recently quit? Then, to get at the issues of the case:

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Why do people smoke?

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Are these issues covered in the actuarial analysis (or CBA)?

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What does a basic ethical analysis include?

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What else would be covered in a full ethical analysis as opposed to a CBA?

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What other issues beyond those in a full ethical analysis or a CBA should be continued?

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Taking everything into account, is smoking good? Discussion of ethical issues

1. What does an ethical analysis add to Viscusi`s actuarial analysis? Using a stakeholder impact analysis framework, an ethical analysis: •

Identifies all the relevant stakeholder groups affected by the activity

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Identifies all significant impacts on these groups

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Prioritizes the impact on each stakeholder group

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Asks all the questions per Chapter 4 of the Text relevant to the nature of the problem/impact so as to cover: rights, fairness and well-offness

Viscusi’s analysis does not include the impact of smoking on all stakeholders affected, nor does it include all types of impact. For example, Viscusi does not include the impact on indirectly affected stakeholders, such as families (for example, of losing a loved one who is possibly a bread-winner), and there is no cost included for the pain and suffering of the family of the smoker. Nor is there a systematic and ranked consideration of the issues of rights, fairness and well-offness of all stakeholders. 2. Would an ethical analysis change the conclusion reached? Why? In this case, the product (cigarettes and cigars) is abnormal in that the nicotine included in it produces an addiction in the smoker, so it is difficult for a smoker to quit. Since the level of addiction is different and unknown for each smoker, the product may not be considered to represent a fair purchase and a continuing free choice even though a disclaimer “…harmful to your health” is printed on each package. Smokers smoke for relaxation and for satisfaction of their social or affinity needs. Leaving aside the craving for nicotine, what would smokers do if smokes were not available? Would they turn to drinking or drugs– with worse results? What would they do if taxes on smokes were increased significantly? Would this deprive low income families of money needed for sustenance? Is there really a good alternative to smoking? If not, is smoking not OK if not good?

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