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Business and Professional Ethics 9th Edition Brooks Dunn Test Bank

richard@qwconsultancy.com

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Ch02 1. As a result of the spectacular stock market crash in 1929, the government enacted the Securities Act of 1933,

the Securities Act of 1934, and: a. The Glass-Steagall Act. b. The Investment Advisers Act. c. The Gramm-Leach-Bliley Act. d. All of the above e. Only a and b ANSWER: e 2. In 1984, Edward Freeman published an article on stakeholder theory. Which of the following is not true? a. A firm needs the support of its stakeholders to enhance the firm’s reputation. b. Stakeholder theory took years to mature. c. Stakeholder theory is not a useful framework for those interested in governance. d. Firms need stakeholders to achieve their corporate objectives. e. Stakeholder theory occurred at the same time as the rise in social and corporate activism. ANSWER: c 3. Which of the following is not covered under the Sarbanes-Oxley Act of 2002 (SOX)? a. The responsibilities of shareholders b. The responsibilities of the board of directors c. The responsibilities of management d. The responsibilities of auditors e. Conflicts of interest ANSWER: a 4. The overall requirement of the Internal Revenue Service Circular 230 is to ensure that tax professionals: a. know their clients. b. always develop tax plans for their clients. c. make tax planning suggestions that, even if they don’t have a chance of success, will save the client

some money in the short term. d. never develop tax shelters. e. only be professional accountants. ANSWER: a 5. A collateralized debt obligation (CDO): a. is an insurance policy that any investor can purchase. b. is a bond that is secured by a portfolio of mortgages. c. protects an investor in the event that the issuer of the mortgage defaults on the contract. d. acts as a hedge against changes in interest rates. e. was outlawed with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Ch02 6. Which of the following is not a sign of an ethical collapse within an organization, according to Marianne

Jennings, author of The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies? a. Pressure to meet financial goals b. Hubris c. Nepotism, favoritism, and hiring sycophants d. An open and candid organizational culture e. A weak board of directors ANSWER: d 7. The U.S. Federal Sentencing Guidelines were introduced in 1991 to: a. help judges formulate sentences. b. avoid sentences that were too light. c. signal potential sentences to executives and directors. d. encourage executives and directors to avoid environmental damage. e. All of the above ANSWER: e 8. Due diligence programs developed to reduce penalties levied under the U.S. Federal Sentencing Guidelines

for environmental harm did not include: a. awareness programs for employees. b. guidelines for employees. c. compliance oversight by corporate officials. d. rewards for noncompliance. e. encouragement for whistleblowers. ANSWER: d 9. Which of the following financial crises or fiascos were not related to the subprime lending crisis? a. Bear Stearns b. Lehman Brothers c. Bernie Madoff d. AIG e. Galleon Group ANSWER: c, e 10. Which was the largest fraud or bankruptcy leading to the crisis of investor confidence in 2002? a. Enron b. Global Crossing c. WorldCom d. HIH Insurance e. Xerox ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Ch02 11. The crisis in investor confidence in 2002 was caused by: a. a lack of integrity of business leaders. b. the manipulation of financial results. c. the boards of directors that did not provide proper oversight. d. the findings of alert auditors. e. All of the above ANSWER: a, b, c 12. SOX contained sections with regard to the auditors and/or audit committee that were designed to: a. increase the independence of management. b. increase the financial literacy of audit committee members. c. limit the conflicts of interest related to the services an auditor can perform. d. restrict the ability of auditors to serve on the audit committee. e. All of the above ANSWER: b, c 13. The U.S. Internal Revenue Service (IRS) implemented Circular 230 to remedy problems found with regard

to the marketing of tax shelters thought to: a. have no other purpose than reducing taxes. b. have lower than 50% chance of success if challenged by the IRS. c. not be in accordance with the client’s needs. d. create fictitious losses. e. All of the above ANSWER: e 14. Why didn’t investors caught in the subprime lending crisis take earlier note of the risks inherent in

investments known as collateralized debt obligations (CDOs)? a. Investors were driven by greed and the desire for high returns. b. Banks were selling and buying them. c. The risks were buried in complex, jargon-oriented documents. d. The risks were diversified over many mortgages. e. Only three of the above ANSWER: a, b, c, d 15. The U.S. government created the Troubled Asset Relief Program (TARP) to: a. bail out investors in U.S. financial firms and institutions. b. avoid a worldwide financial crisis. c. stimulate the U.S. economy. d. resolve the financial crisis in Iceland. e. make a profit on the ultimate sale assets bought at a low value. ANSWER: a, b, c Copyright Cengage Learning. Powered by Cognero.

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Ch02 16. The Dodd-Frank Wall Street Reform and Consumer Protection Act was created after the subprime lending

fiasco to protect consumers from deceptive practices related to: a. mortgages. b. credit cards. c. cars. d. financial derivatives. e. All of the above ANSWER: a, b, d 17. A Ponzi scheme, such as the one Bernie Madoff ran, is:

hard to hide forever. a. a card game. b. a sound investment scheme. c. a scheme to improve the environment. d. hard to hide forever. e. None of the above ANSWER: d 18. Ralph Nader contributed to the lack of credibility of corporations by exposing: a. their excessive bonus schemes. b. their greed. c. their poor car safety. d. their poor environmental record. e. the “seller beware” attitude of toy manufacturers. ANSWER: c, d 19. Freddie Mac and Fannie Mae: a. were created to support the U.S. housing market. b. stimulated the U.S. housing bubble. c. provided bailout funds to the U.S. government. d. acted in the best interests of consumers. e. acted in the best interests of lenders. ANSWER: a, b 20. Who among the following demonstrated extraordinary hubris (the arrogant belief that rules are for other

people but not for us)? a. Kenneth Lay b. Bernie Ebbers c. Arthur Andersen d. Scott Sullivan e. All of the above Copyright Cengage Learning. Powered by Cognero.

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Ch06 must protect the public interest because professionals serving the public: a. must be trusted by the public. b. must serve only the best interests of their client. c. must do what their boss says. d. must do only what is in their self-interest. ANSWER: a 22. Maintaining the confidentiality of client or employer matters is considered essential for a professional accountant (PA) in order that clients and employers: a. will continue to discuss all matters with the PA. b. will not fire the PA. c. will be protected from prosecution. d. will be able to maximize profits. e. will not find their competitive position to be jeopardized. ANSWER: a 23. New NOCLAR standards have been introduced in some jurisdictions requiring professional accountants (PAs) to report internally if a client or employer is not in compliance with laws or regulations on a significant matter, and if the matter is not remediated, to report externally because some PAs were witnessing noncompliance but not speaking up because: a. they thought confidentiality prohibited it. b. they weren’t sure if confidentiality prohibited it. c. they didn’t have the moral courage to do so. d. they did not understand that speaking up was in the public interest. e. they did not want to be identified as whistleblowers. ANSWER: a, b, c, d, e 24. If you are a professional accountant who is considering reporting noncompliance as contemplated under the NOCLAR standards, you would decide if the matter was significant enough to require reporting if it: a. was larger than the company’s materiality standards for financial disclosure. b. would have increased bonuses. c. was self-correcting in the next quarter year and resulted in no distortion. d. understated taxes payable. e. avoided the exercise of legal covenants from lenders. ANSWER: a, b, d, e 25. Professionalism is essential for professional accountants to protect the public interest. Which of the following are the most important aspects of professionalism? a. Technical competence b. Ethical behavior c. Awareness and consideration of the public interest d. Professional skepticism e. Moral courage ANSWER: a, b, c, d, e Copyright Cengage Learning. Powered by Cognero.

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Ch06

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Ch07 1. The new enterprise risk management (ERM) focuses on how risks and opportunities might impact the achievement of strategic goals as well as the creation, preservation, realization, or erosion of value. ERM involves the assessment of an organization’s: a. culture. b. capabilities. c. practices. d. strategies. e. All but one of the above ANSWER: a, b, c, d 2. It important that enterprise risk management (ERM) and strategy setting are integrated because: a. strategies should not be developed if the inherent risks are too high. b. strategies should align with an organization’s mission, vision, and operational risk profiles. c. ethics risks should be considered before strategies are activated. d. mindset risks need to be minimized. e. All of the above ANSWER: e 3. Ethics and ethical corporate culture should play a vital role in setting: a. the control environment. b. risk assessment. c. information and communication. d. monitoring. e. control activities. ANSWER: a, b, d, e 4. Which of the following is a source of risk identified by both the AICPA/CICA/CPA Canada and the Institute of Internal Auditors? a. Environmental b. Informational c. Financial d. Operational e. All of the above ANSWER: d 5. What is the recommended strategy when stakeholders’ potential for threat is high and the stakeholders’ potential for cooperation is high? a. Monitor b. Involve c. Discuss d. Defend e. None of the above ANSWER: e Copyright Cengage Learning. Powered by Cognero.

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Ch07 6. What is the recommended strategy when stakeholders’ potential for threat is low and the stakeholders’ potential for cooperation is high? a. Monitor b. Involve c. Discuss d. Defend e. None of the above ANSWER: b 7. The disclosure of the following three performance categories is recommended by the Global Reporting Initiative. a. Economic, environmental, and organizational b. Environmental, financial, and social c. Economic, organizational, and social d. Environmental, financial, and organizational e. Economic, environmental, and social ANSWER: e 8. The following performance component recommended by the Global Reporting Initiative relates to customer health and safety, marketing communications, and customer privacy. a. Labor practices b. Human rights c. Product responsibility d. Society e. Customer rights ANSWER: c 9. What are the two most difficult practical aspects of sustainability reporting? a. Identifying corporate impacts b. Measuring corporate impacts c. Deciding on the disclosure format d. Identifying boundaries for the report (i.e., number of years, countries, activities, etc.) e. Avoiding legal liability for misdeeds ANSWER: a, b 10. Auditors are mandated to assess the client’s risk of financial reporting fraud. Auditing standard the following a mandatory tool in fraud assessment. a. Discussion and brainstorming b. The fraud triangle c. Interviews with management d. The development of fraud training programs e. All of the above ANSWER: a

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11. Which of the following would be the least useful report of ethics risks and opportunities? Copyright Cengage Learning. Powered by Cognero.

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14. The Union Carbide-Bhopal Case (Chapter 1, pages 53-55) What this case has to offer I find this case to be an excellent way of: 1. Breaking the ice with a new group and developing a good learning dynamic. Essentially this means getting to know the group, getting them to start discussing issues which they are not used to and sharing their thoughts and values. I have found that one of the most effective ways of fostering learning in ethics is to create a dynamic where class members are led to discuss issues and to share their values and beliefs with their peers. 2. Developing a greater awareness and appreciation of more ethical issues. Usually, the discussion dynamic produces a greater awareness by everyone of issues which are important to the group and why. Often people are influenced by their circumstances to think narrowly about their own interests, or to dismiss views contrary to their own as hare-brained, but when their colleagues express them, they listen and develop an appreciation for them. 3. Stimulating discussion, leading to a desire to learn more about ethics Bhopal-Union Carbide provides ample opportunity for stimulating discussion about real issues: issues that are relevant and important to business and to professionals. As a result, people see the importance of learning more about ethics and about making ethical decisions. 4. Exploring the following specific ethical issues, among others: • • • • • • • • • •

Do businesses have responsibilities beyond what is prescribed by law? Whose laws should apply, foreign or domestic? Should businesses satisfy the needs of current or future shareholders? Should businesses respond to the needs of non-shareholder stakeholders? Should businesses subscribe to goals other than profit? When/how should trade-offs between profit and safety be made? What is the appropriate role for the company/for government? Can a company get away with unethical behavior in far-away lands? Who is to blame for the tragedy in Bhopal? What can be done to avoid a recurrence?

P a g e | 52 Teaching suggestions Usually, I barely introduce myself and the objectives of the course/session, and then ask the participants to read the Bhopal-Union Carbide Case. It takes them about 7-10 minutes, and then I start the discussion by asking them what ethical issues they noted (question 1) and why they thought each was an ethical problem. The suggestions come with increasing frequency, and the class will want to debate each of the controversial issues as it comes up. I usually resist this until maybe four or five major items are on the table and then I find I can find a natural entry point to begin exploring the issues I have listed on the previous page. The ethical issues brought forward will rarely be in the order I have organized them into, nor will all the issues listed be raised without prompting. I don't worry about this, partly because I can steer the discussion to cover the main issues and partly because I usually want to cut off discussion after about 45 minutes. Even if all the issues are not dealt with by that time, most of the pedagogical objectives outlined above will have been met. I wind up the case discussion dealing with questions 2 and 3, and then move into a discussion of the other issues raised in Chapter 1 using overheads covering: •

Background: a definition of ethics, reasons for heightened interest in ethics

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Important concepts: stakeholder, corporate social contract, codes of conduct

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Objectives of business: Milton Friedman's doctrine and rejoinders

This usually takes 90 minutes, in total, at a brisk pace. The students are very energized and keen to go on. Sometimes we have to finish the discussion of Friedman at the beginning of our next session. Discussion of ethical issues/questions 1. What are the ethical issues raised by this case? Profit vs. safety Among the first topics ethical issues suggested will be the causing of death and injury by a commercial process. I usually play devil's advocate here, by asking questions and reminding the participants that “the traditional role of business is to pursue profit and only profit, within the law, of course...” “Isn't it the traditional role of government to create the laws and set standards to protect society?” “Anyway, weren’t most of those killed or injured just illegal squatters or poor living in a shanty town?” It doesn't take long for the class to agree that safety should be one of a corporation's goals, if not for altruistic reasons, then for the self-interest inherent in continued profitability. Where they find difficulty is in assessing the trade-off between safety and profit—or in this case, the reduction of a loss. They don't have a framework to handle this assessment and trade-off, nor the trade-off between short- and long-term profit, and are pleased to hear that the frameworks for ethical decision making will be helpful here. Assessing blame: the role of government, whose laws should apply? The discussion often moves rather quickly to who is to blame for the tragedy. Some will claim that the government was at fault for not regulating tightly enough. After Business & Professional Ethics for Directors, Executives & Accountants, 9e Leonard J. Brooks and Paul Dunn, ©2021, 2018 Cengage Learning, Inc.

P a g e | 53 all, that is the role of government, and business' role is to respond to government. They often couple this argument with the issue of business needing to be competitive on a global basis and thus—with the encouragement of developing countries’ governments– needing to ovoid heavy cost/red tape safety regulations. To this, I ask how they think laws and regulations are set: do laws reflect how society wants to be governed, and/or is there a lag? What causes this lag time for the political process? How does lobbying by special interest groups, including the companies to be regulated, fit in? So, the class comes to realize that believing that the traditional division of roles of business and government will result in the fair and proper treatment of society may be naïve. In developing countries, the probability of bribery and ignorance influencing the process of standard-setting is significant, so relying on developing countries’ regulations may be risky if your company may be judged by higher standards, such as those in your largest market, or at home. The latter was the case for Union Carbide, even though the Indian government had encouraged the operation (thinking Union Carbide and its products to be of high quality and high value-added). Negligence is a factor that is usually debated. The local management, if they were adequately knowledgeable, clearly lost track during the shutdown of how many fail-safe safeguards were under repair. The loss of good human power as a result of cost-cutting is probably the responsibility of the U.S. firm, even though they only own a slim majority (50.9%) of the company, because they had the knowledge to understand what the result might be. They certainly failed to follow-up on the state of repair of the facility, as they would have done in the United States. A similar case can be made for the culpability of the Indian government, but it is important to note that neither the Indian courts nor the U.S. shareholders took much notice of this. They blamed the management in the United States. The lesson here, in hindsight, is that following the tighter U.S. regulations would have been advisable. Can unethical behavior go unnoticed? Some students will think that they and their companies can get away with unethical or illegal acts. Of course they can, but there is a risk of getting caught, and the cost of restitution may be enormous. Anyone who believes that developing countries are too far away to attract attention is mistaken. The question to be asked on behalf of profit-only advocates is whether the increasing risk of exposure is worth taking. Aside from loss of life and health, what is the greatest loss? This is an interesting question to put to the class. Some will say reputation...and I will ask how to put a value on it. After some thought, the suggestion will come that this cost is represented by an estimate of lost sales to potential customers. Actually the right answer is the lost margin of profit on those lost sales, and this can be estimated relatively easily. The total can be staggering to most companies and far exceeds the legal penalties, which might be assessed. This is a revealing discussion for many hard-line students. What can be done to avoid a recurrence?

P a g e | 54 Most large companies have developed internal mechanisms to maintain safety and ecological standards on a worldwide basis. This usually involves a mechanism for instant notification to head office to enable coordinated, effective crisis management. As a result of this tragedy, the heads of Union Carbide and Dow Chemical in Canada caused the Canadian Chemical Producers Association to develop a self-policing Responsible Care program (see http://www.canadianchemistry.ca/responsible_care/index.php/en/index ) designed to minimize the chance of problems developing and to quickly remediate them if they did occur. This program became so highly thought of that it has been copied in the United States and around the world. It is interesting to note for the class that often such learning and useful programs have to wait until tragedies happen. Proactive management is needed to avoid this. 2. Did the doctrine of "Limited Liability" apply to protect the shareholders of Union Carbide Corporation (U.S.)? Many people have heard that the doctrine of limited liability will protect you, if you are a shareholder, if difficulties arise for the company you own. But they really don't understand what the doctrine means, and, like the Union Carbide shareholders, they are in for a shock in certain circumstances. This is because the doctrine of limited liability applies when a shareholder has bought shares directly from the company and has paid for all that they own in the transaction. If a problem then develops for the company, no one can require the shareholder to put up more money. However, the doctrine does not protect the shareholder from losing the market value of the shares owned. To this extent, any shareholder—like the Union Carbide (U.S.) shareholders–can still be at risk, despite the doctrine of limited liability. 3. Were the Indian operations, which were being overseen by the managers of Union Carbide Corporation (U.S.), in compliance with legal, moral, or ethical standards? One of the more interesting parts of this case discussion occurs when the students grapple with whether the Indian operations were in accord with legal, moral, or ethical standards. This forces them to figure out the differences, if any. Only a very few will continue to argue that there are no differences at all, and these people are generally lawyers. (Lawyers tend to be susceptible to functional fixation in this regard.) Usually the students will want to separate the analysis on two reference dimensions—Indian and U.S.–and arrive at the conclusions in the following table. Compliance With… Reference Society Indian standards USA standards

Legal Yes No

Moral Yes/No No

Ethical No No

I usually have to clarify what I mean by moral and ethical standards, which I do as follows: • •

Moral has to do with habits—what current practices or mores are. Ethical refers to what mores should be—respecting a set of relatively absolute rights or values, like the right to life, to health, etc. In clarifying this concept, I

P a g e | 97 7. Why do you think that Arthur Andersen, Enron’s auditors, did not identify the misuse of SPEs earlier and make the board of directors aware of the dilemma? Arthur Andersen were aware of the use of SPEs and their quality control partner in Chicago emailed the audit partner in Houston to say that a clean audit opinion should not be given. However, the audit partner ignored the warning, probably because he did not want to aggravate Enron’s management and risk losing the audit that supplied most of his personal remuneration. In summary, the key decision maker at Arthur Andersen was conflicted, decided in favor of his own self-interest, and did not warn or challenge the Board on these matters. 8. How would you characterize Enron’s corporate culture? How did it contribute to the disaster? Enron’s corporate culture was unethical. It was a culture of deception, not of integrity. (See PPTs 38, 39). It was fraught with conflicts of interest; unethical and illegal acts; poor examples set by directors and executives; and the directors, professional accountants and lawyers involved were motivated by self-interest instead of by sustainable interest of shareholders and other stakeholders. In the process of allowing the individual self-interest of the company’s directors, personnel, and agents to be satisfied, they ignored their fiduciary duty to the shareholders and other stakeholders. The Board members, who were independent of management and not conflicted, were in the dark. Measures to make a corporate ethical culture are discussed in the Text and the PowerPoint slides. Additional question, not in the Text: 9. How much time should a director of Enron have been spending on Enron matters each month? How many large company boards should a director serve on? This depends on the complexity of the company’s operations, the competence and trust placed in its management and governance systems, and the competence and skills of the Board member. On a company of significant size, a director may have to spend 4-5 days per month to discharge their duties properly. On this basis, allowing for personal business, a person who serves only as a director could only serve on 3-4 Boards. Subsequent Events May 25, 2006 From Sunseri, Gina, and Rottman, Sylvie (May 25, 2006). “Enron Verdict: Ken Lay Guilty on All Counts, Skilling on 19 Counts.” ABC News, http://abcnews.go.com/Business/LegalCenter/story?id=2003728&page=1 : “Lay, 64, was convicted on all six counts against him, including conspiracy to commit securities and wire fraud. He faces a maximum of 45 years in prison. Lay also faces 120 years in prison in a separate case. “Lay posted a $5 million bond secured with family-owned properties at a hearing following the verdict. He was ordered to stay in the Southern District of Texas or Colorado.

P a g e | 98 "’I firmly believe I'm innocent of the charges against me," Lay said following the hearing. "We believe that God in fact is in control and indeed he does work all things for good for those who love the lord.’ “Skilling, 52, was convicted on 19 counts of conspiracy and fraud. Combined with his conviction on one count of insider trading, he faces a maximum of 185 years in prison. Skilling was acquitted of nine other charges relating to insider trading. "’Obviously, I'm disappointed," Skilling told reporters outside the courthouse. "But that's the way the system works.’ "’I think we fought a good fight — some things work, some things don't,’ he said… “In a separate, nonjury bank fraud trial related to Lay's personal banking, U.S. District Judge Sim Lake found the Enron founder guilty of bank fraud and making false statements to banks. Lake had withheld his verdict in the Lay bank fraud case until the Lay-Skilling jury announced its verdict. Lay faces up to 120 years in prison in that case.” Useful Articles, Links and Videos C-Span (October 25, 2010). “Q&A with Bethany Mclean, author of All the Devils are Here and Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron,” video, 56:54, http://www.c-spanvideo.org/program/296214-1 Gibney, Alex (2006) Film “Enron: The Smartest Guys in the Room” [film preview, video footage and Enron timeline], available at http://www.pbs.org/independentlens/enron/index.html# Rose, Charlie (January 21, 2002). “Enron Bankruptcy: A Conversation about Enron’s Declaration of Bankruptcy and the Implications for corporate America with Allan Sloan of Newsweek and Kurt Eichenwald of The New York Times,” video, https://charlierose.com/videos/9768 [The video includes a series of one-on-one discussions and panels with four journalists, the then-SEC chairman, political critics, and U.S. senators discussing the Enron scandal from its beginnings]. Time [Enron scandal webpage containing many links to stories] at http://www.time.com/time/2002/enron/ [Link not active in 2020.]

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2. Arthur Andersen’s Troubles (Chapter 2, pages 122-130) What this case has to offer Arthur Andersen (AA) will forever be a key part of the Enron-SOX chain that accelerated changes in the accountability and governance paradigm for corporations and the accounting profession. In fact, AA’s problems were systemic, as their root was in the firm’s flawed governance system where the desire for profit was allowed to outweigh the firm’s fiduciary interests to clients, shareholders, and the public interest. The case presents excellent opportunities to review conflict of interest issues, the need for inclusion of ethics in an organization’s strategy, operations and compliance processes, and for illustrating how the expectations of the public can dramatically affect an organization. AA’s disappearance dramatically illustrates how risk managers had been in the habit of placing too low a value on losing the ability to operate—known as “franchise risk.” Post-Enron and post-AA that value has moved upward considerably Teaching suggestions I use the PowerPoint (PPT) slides for the Enron case to tell the story of Arthur Andersen’s Troubles, specifically, PPTs 24 and 26 in Session 2 of my Ethics & Governance course. These PowerPoints are available through Cengage on the instructor companion website for the Text. The key issues are: •

What happened and who did it?

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The 3% Special Purpose Entity (SPE) accounting rule and how it led to manipulation.

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How following the 3% rule precisely, and ignoring the overall principle that there must be external validity (an independent outside buyer/seller) to allow the recording of profit, led to manipulation.

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What the flaw was in AA’s governance system that permitted the Enron, WorldCom, Waste Management and Sunbeam fiascos.

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Other matters raised in the questions below.

Discussion of ethical issues The following questions reveal the key points of the case: 1. What did Arthur Andersen contribute to the Enron disaster? AA failed to protect the interest of current and future shareholders, and stakeholders that relied upon the financial reports and integrity of the company. AA failed to form a reliable part of the Enron governance system, thereby leaving the directors and other stakeholders at risk. See the list of AA’s apparent mistakes in the case. 2. What Arthur Andersen decisions were faulty? See list of AA’s apparent mistakes in the Text, as well as in the section on AA’s internal Business & Professional Ethics for Directors, Executives & Accountants, 9e Leonard J. Brooks and Paul Dunn, ©2021, 2018 Cengage Learning, Inc.

P a g e | 100 control flaw. 3. What was the prime motivation behind the decisions of Arthur Andersen’s audit partners on the Enron, WorldCom, Waste Management, and Sunbeam audits: the public interest or something else? Cite examples that reveal this motivation. It was revenue generation and retention. They served their self-interest rather than the public interest by not acting upon the memos from their quality control personnel, and not challenging the manipulative practices and structures at Enron. 4. Why should an auditor make decisions in the public interest rather than in the interest of management or current shareholders? An auditor is the agent of the shareholders, and is elected annually at the Annual general Meeting of Shareholders by the shareholders. As such, the auditor must make sure that audited annual financial statements comply with Generally Accepted Accounting Principles (GAAP), and GAAP are designed to produce statements that do not favor the interests of current shareholders or executives and mislead future shareholders and other stakeholders such as governments, taxing authorities and the like. GAAP is therefore designed to produce statements that are in the public interest, and the auditor is the agent who should ensure GAAP is properly applied. An auditor who does not protect the public interest can face reputational and legal consequences because the expectations of the public have not been met. 5. Why didn’t the Arthur Andersen partners responsible for quality control stop the flawed decisions of the audit partners? They tried via memos, but the firm’s governance structure had earlier determined that the audit partner in charge could override them. Clearly, AA’s governing body made the wrong decision. 6. Should all of Arthur Andersen have suffered for the actions or inactions of fewer than 100 people? Which of Arthur Andersen’s personnel should have been prosecuted? I don’t think so, because it seems unfair to the many innocent partners, staff and audit client stakeholders that lost value because of the resulting discontinuity. I further do not believe that society was well-served by the loss of one of the Big Five, thus concentrating the choices for independent audit work in the future. On the other hand, the disappearance of AA sent a significant signal to the rest of the audit world. I would have preferred larger fine and imprisonment for AA’s decision makers who determined and carried out the policy of audit partner primacy, plus a very large fine and sanctions (e.g., no new SEC clients for 3 months) for the continuing firm. I would also consider carefully whether non-partner audit personnel had a responsibility for whistleblowing, and I would signal how this should be done in the future. 7. Under what circumstances should audit firms shred or destroy audit working papers? Given the developments in the AA Case, audit working papers should not be destroyed before they could be of assistance and/or relevant in any legal, tax or other dispute. Business & Professional Ethics for Directors, Executives & Accountants, 9e Leonard J. Brooks and Paul Dunn, ©2021, 2018 Cengage Learning, Inc.

P a g e | 153 Do Not Disclose •

Cesar has a right to privacy. He was pardoned. Therefore, for all intents and purposes the crime never occurred. So, there is nothing to confess or disclose.

•

The crime, fratricide, has nothing to do with providing information services. So, because there is no link between the two, there is no need to make the disclosure. Make the Disclosure

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To be effective in business, partners need to be able to trust one another. George has right to know the background of his potential partner, so that he can decide whether or not this is the sort of person with whom he can rely. George has the right to information so that he can assess the risks of having Cesar as his business partner.

2. Did George have a right to know about Cesar’s criminal past? Rawls argues that each person has a right to liberty that is commensurate with the liberty of everyone else. Also, inequalities should be to everyone’s advantage. In this case, under the double-jeopardy rule, a person should not be convicted of the same crime twice. If Cesar discloses and he suffers as a result, then he is being punished for the same crime twice. This would not be fair. On the other hand, if George is not informed then he is not on an equal plane with Cesar. Cesar knows something that may be potentially harmful to the business; that they may lose clients because of Cesar’s conviction. This inequality in information is not to everyone’s advantage. So, Cesar should make the disclosure. George may nevertheless accept Cesar as a legitimate business partner. He may view the crime as being justified, with a debt that has been repaid to society, and a crime that is not relevant to their business venture. Utilitarianism focuses on the consequences of actions. If you murder your father, these are some of the consequences: imprisonment, being shunned by many segments of society, carrying the stigma of being an ex-convict, and having business colleagues view you in a jaundice manner. Cesar may very well lose George as a potential business partner if he makes the disclosure, but that is one of the consequences of his crime. The ethical action is for Cesar to make the disclosure and live with the consequences. Virtue ethics takes a more holistic approach, looking at all the characteristics and traits of the individual. The murder of his father was a horrendous crime, and his reticence about disclosing this to his partner demonstrates a lack of candor and respect for George. On the positive side, however, he argued that the murder was based on compassion for his mother and brother. He demonstrated determination by completing his university while in prison. He was succeeding as a businessman, running a publicly traded company. His behavior was good enough to earn a pardon. So, like everyone else, Cesar has both good and bad aspects to his character. The students can then

P a g e | 154 explain whether they put more weight on the positive or the negative aspects of his character.

Chapter 4—Practical Ethical Decision Making Chapter Questions and Case Solutions Chapter Questions..................................................................2 An Illustration of Comprehensive Ethical Decision Making.................................................................................. .5 Illustrative Applications of Stakeholder Impact Analysis................................................................................ ..5 Business & Professional Ethics for Directors, Executives & Accountants, 9e Leonard J. Brooks and Paul Dunn, ©2021, 2018 Cengage Learning, Inc.

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Case Solutions........................................................................5

Chapter Questions 1. Why should directors, executives, and accountants understand consequentialism, deontology, and virtue ethics? Directors, executives and accountants frequently encounter problems requiring decisions where the right action is not covered in law or a company’s code, or where the code is being created or re-examined. In those instances, the traditional philosophical approaches to ethical decision making can raise issues for consideration and provide guidance for ethical decisions. Understanding why the consequences of an act are importance, and how to assess them with regard to expectations of duty, observance of rights and fairness, and of virtues to be demonstrated, can provide important insights. In the future, decisions will be increasingly scrutinized for their ethicality as well as their legality and profitability, and must be, and be seen to be, defensible according to traditional considerations. 2. Before the recent financial scandals and governance reforms, few corporate leaders were selected for their “virtues” other than their ability to make profits. Has this changed, and if so, why? Yes. With the recent revision and stiffening of governance requirements, directors are now expected to select and monitor senior executives (CEO and CFO, at least) based in part on their ethicality as evidenced by their contribution of a wholesome “tone at the top.” Without proactive ethical leadership, a company’s ethics program (see Text, Chapter 5, Figures 5.7, 5.8, 5.9, and 5.10) will not succeed. 3. Is it wise for a decision maker to take into account more than profit when making decisions that have a significant social impact? Why? Yes. An organization needs the support of its primary stakeholders to attain its strategic objectives in the long run. It cannot afford to ignore the interests of these stakeholders and those that they are influenced by. Profit is usually a short-term concept that needs to be stretched into a multi-period framework by considering more than just the next buck. 4. If a framework for ethical decision making is to be employed, why is it essential to incorporate all four considerations of well-offness, fairness, individual rights and duties, and virtues expected? It is possible for a set of stakeholders to be better off as a whole, but the proposed action may be grossly unfair to one group (say, the children involved) or may offend the rights of one or more groups (say, women or men) to a degree that may cause the decision to be considered unethical. Moreover, failure to consider expected duties and virtues will damage the corporation’s credibility and reputation, thereby weakening the Business & Professional Ethics for Directors, Executives & Accountants, 9e Leonard J. Brooks and Paul Dunn, ©2021, 2018 Cengage Learning, Inc.

P a g e | 156 support of various stakeholder groups and the organization’s ability to reach its strategic objectives. 5. Is the modified 5-question approach to ethical decision making superior to the modified moral standards or modified Pastin approach? Not really. The superior approach for a specific problem depends on the nature of the impacts involved. If future impacts of a subjective nature are involved, then costbenefit analysis should be employed. If the ground rules of a company are expected to influence the implementation of a decision, then they should be canvassed. If a commons is at stake, then employing that concept may help the executives involved to analyze the proposed actions ethically. A particular executive’s preference or style may also have to be taken into account. The circumstances will dictate the approach which is most attractive/suitable. 6. Under what circumstances would it be best to use each of the following frameworks: the philosophical set of consequentialism, deontology, and virtue ethics; the modified 5question; the modified moral standards; and the modified Pastin approach? The traditional philosophical approaches—consequentialism, deontology, and virtue ethics–are time-honored approaches that have been refined into the modified 5question approach; the modified moral standards; and the modified Pastin approaches for convenient decision making in those instances noted below. The philosophical approaches, taken as a set, can be applied to any problem rather than a specific subset, and they would be superior where there are strong expectations for the demonstration of duty and of virtues in the solution. Given what was said in response to the last question, the modified 5-question approach seems best suited to short-term, profit-oriented problems that confront the law and impact the environment or require a tailored, specific fifth question. The modified moral standards approach is suited to people-related or future-oriented problems where externalities are present that are not captured in the profit measure. Modified Pastin's approach suits problems internal to an organization. Each approach/or part thereof can be used on almost all problems. 7. How would you convince a CEO not to treat the environment as a cost-free commons? Depending on the person involved, they may be responsive to: altruism, the avoidance of big fines (corporate & personal) or jail; or to arguments that under-pricing the use of the environment can lead to resource allocations which will look foolish in a few years because the cost structures will change, or that opportunities for opening up new markets or competitive advantages will be lost, or that whistle-blowing or activist groups will make things uncomfortable, etc. I would show the CEO what a cost-benefit or risk benefit analysis would look like that would bring such factors into the decision computation. The decision would be up to the CEO, but at least all the factors would be on the table, not hidden or forgotten.

Business and Professional Ethics 9th Edition Brooks Dunn Test Bank and Solution Manual