Question: Assume that the CPA firm of Packers &

> Would moral hazard and adverse selection still arise in financial markets if information were not asymmetric? Explain.

> Describe two ways in which financial intermediaries help lower transaction costs in the economy.

> How can economies of scale help explain the existence of financial intermediaries?

> Which provisions of the Global Legal Settlement do you think are beneficial, and which are not?

> Which provisions of Sarbanes-Oxley do you think are beneficial, and which are not?

> Describe two conflicts of interest that occur in accounting firms.

> Describe two conflicts of interest that occur when underwriting and research are provided by a single investment firm.

> Explain how the separation of ownership and control in American corporations might lead to poor management.

> How does the free-rider problem aggravate adverse selection and moral hazard problems in financial markets?

> What are the other important financial intermediaries in the economy besides banks?

> Rich people often worry that others will seek to marry them only for their money. Is this a problem of adverse selection?

> Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done so? Why?

> How can the existence of asymmetric information provide a rationale for government regulation of financial markets?

> You are in the market for a used car. At a used car lot, you know that the blue book value for the cars you are looking at is between $20,000 and $24,000. If you believe the dealer knows as much about the car as you, how much are you willing to pay? Why?

> Now, you believe the dealer knows more about the cars than you. How much are you willing to pay? Why? How can this be resolved in a competitive market?

> You own a house worth $400,000 that is located on a river. If the river floods moderately, the house will be completely destroyed. This happens about once every 50 years. If you build a seawall, the river would have to flood heavily to destroy your house

> You wish to hire Ricky to manage your Dallas operations. The profits from the operations depend partially on how hard Ricky works, as follows. If Ricky is lazy, he will surf the Internet all day, and he views this as a zero cost opportunity. However, R

> Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see that the money supply has had a sharp rise in the past week, you should go out and buy stocks? Why or why not?

> If a forecaster spends hours every day studying data to forecast interest rates, but his expectations are not as accurate as predicting that tomorrow’s interest rates will be identical to today’s interest rates, are his expectations optimal?

> “Whenever it is snowing when Joe Commuter gets up in the morning, he misjudges how long it will take him to drive to work. Otherwise, his expectations of the driving time are perfectly accurate. Considering that it snows only once every 10 years where Jo

> What is the basic activity of banks?

> “Forecasters’ predictions of inflation are notoriously inaccurate, so their expectations of inflation cannot be optimal.” Is this statement true, false, or uncertain? Explain your answer.

> “Human fear is the source of stock market crashes, so these crashes indicate that expectations in the stock market cannot be optimal.” Is this statement true, false, or uncertain? Explain your answer.

> If higher money growth is associated with higher future inflation and if announced money growth turns out to be extremely high but is still less than the market expected, what do you think would happen to long-term bond prices?

> “An efficient market is one in which no one ever profits from having better information than the rest.” Is this statement true, false, or uncertain? Explain your answer.

> “If most participants in the stock market do not follow what is happening to the monetary aggregates, prices of common stocks will not fully reflect information about them.” Is this statement true, false, or uncertain? Explain your answer.

> If I read in the Wall Street Journal that the “smart money” on Wall Street expects stock prices to fall, should I follow that lead and sell all my stocks?

> Can a person with optimal expectations expect the price of Google to rise by 10% in the next month?

> If my broker has been right in her five previous buy and sell recommendations, should I continue listening to her advice?

> “If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market.” Is this statement true, false, or uncertain? Explain your answer.

> Can we expect the value of the dollar to rise by 2% next week if our expectations are optimal?

> Looking at Figure 1.3, in what years would you have chosen to visit the Grand Canyon in Arizona rather than the Tower of London? Figure 1.3: Index (March 1973 = 100) 150 135 120 105 90 75 1975 1980 1985 1990 1995 2000 2005 2010

> The following table lists foreign exchange rates between U.S. dollars and British pounds (GBP) during April. Which day would have been the best day to convert $200 into British pounds? Which day would have been the worst day? What would be the differe

> What are the objectives of audit risk assessment, and why is it important in assessing the likelihood that fraud may occur? Explain why risk assessment performed during audit planning sets the tone for the entire audit engagement.

> Assume that a CPA serves as an audit client’s business consultant and performs each of the following services for the client. Identify the threats to independence. Do you believe any safeguards can be employed to reduce the threat to an acceptable level?

> Do you believe that the SEC should prohibit auditors from providing all nonaudit services for audit clients? Use ethical reasoning to support your answer.

> Do you believe the internal audit activity should be independent? Explain.

> How might financial incentives in the form of client services unconsciously introduce auditor bias into the independent audit function? Are there any solutions to the conflict?

> Is independence impaired when an auditor is hired, paid, and fired by the same corporate managers whose activities are the subject of the audit? Does it matter that in most companies the audit committee hires, evaluate, fires (if appropriate), and determ

> It has been said that independence is the cornerstone of the accounting profession. Explain what this means. What does it mean to say that auditors have special and critical gatekeeping duties?

> Explain the safeguards that can be used to reduce or eliminate threats to audit independence.

> Is accounting a trustworthy profession? How would you know whether it is or is not?

> On May 20, 2014, the SEC settled an investigation of James T. Adams, the former chief risk officer at Deloitte, for causing violations of the auditor independence rules. It seems that Adams accepted tens of thousands of casino markers while he was the ad

> Hofstede’s Cultural Dimensions in Exhibit 1.2 indicate that China has a score of only 20 in Individualism, while the U.S. score is 91. How might the differences in scores manifest itself when the public interest is threatened by harmful actions taken by

> In August 2008, EY agreed to pay more than $2.9 million to the SEC to settle charges that it violated ethics rules by co-producing a series of audio CDs with a man who was also a director at three of EY’s audit clients. According to the SEC, EY collabora

> According to SOX rules that mandate auditor rotation, the lead audit partner on an engagement is prohibited from providing those services for a client for greater than five consecutive years. The purpose of the rule is to encourage professional skepticis

> In recent years the move by accounting firms to offshore tax and consulting work has grown and expanded into audit work. What are the ethical concerns that might be raised about the practice of electronically transmitting audit information to offshore ce

> Assume you are the senior in charge of the audit of a client in New York who offers you two tickets to the Super Bowl between the New York Giants and the Denver Broncos. The opportunity to see the Manning brothers square off against each other is appeali

> Explain the threats to professional skepticism that might influence audit judgment.

> In January 2008, it was discovered that William Borchard, who handled due diligence for clients of PwC interested in mergers and acquisitions, divulged controversial plans to Gregory Raben, an auditor at the firm, and Raben used the information to buy st

> You were engaged to file the 2015 individual and corporate tax returns for a client. The client provided her records and other tax information on March 1, 2016, to help prepare the 2015 tax return. Your client paid you $12,000 in advance to prepare those

> You previously worked for the Department of Revenue, a governmental agency in your town. You cut all ties with the agency after you left two years ago to start your own tax accounting business. One day you receive a call from the agency asking you to con

> You have decided to leave your CPA firm. Using the AICPA rules as a guide, answer the following questions: (1) Can you post some negative comments about your former employer on Twitter? (2) Can you call your former clients and tell them that you are le

> Your best friend is from another country. One day after a particularly stimulating lecture on the meaning of ethics by your instructor, you and your friend disagree about whether culture plays a role in ethical behavior. You state that good ethics are go

> You’re struggling in your new accounting practice to tap into a potential client base. You have tried traditional advertising and marketing tools to no avail. Your friend tells you to use social media as a tool to reach potential customers. You’re not su

> Andy Simmons is a CPA with his own accounting and tax practice. He occasionally does an audit for small business clients. One day an audit client shows Andy a letter from the local Property Tax Assessor’s office. It seems the client inquired about the pr

> What is the problem with an auditor overrelying on management’s representations on the financial statements?

> Can a CPA auditor be independent without being objective? Can a CPA auditor be objective without being independent? Explain.

> What are the dangers of creeping commercialism in the accounting profession?

> In our discussion of the KPMG professional judgment framework, we pointed out that biased judgments can be made because of judgment tendencies. One such tendency that was not included in the framework is self-serving bias. Explain what you think this mea

> 9. The following questions are about corporate governance and executive compensation. (a) How does agency theory address the issue of executive compensation? (b) How might stakeholder theory argue against the current model of executive compensation in th

> Do you believe that employees who observe more occupational fraud in their organizations are more likely to engage in occupational fraud themselves?

> Explain how “group-think” might lead a person to ignore moral and ethical duty in an organization.

> It has been said that recent graduates from a business school majoring in accounting and just entering the profession are especially vulnerable to ethical missteps because they are often naive and may not see the ethical aspects of situations they confro

> Steroid use in baseball is an important societal issue. Many members of society are concerned that their young sons and daughters may be negatively influenced by what apparently has been done at the major league level to gain an advantage and the possibi

> How do employee perceptions of commitment, integrity, and transparency in the workplace contribute toward creating an ethical corporate culture?

> One way of analyzing whether NSA whistleblower Edward Snowden’s actions were justified in leaking classified materials exposing the breadth of the U.S. government’s surveillance activities is by weighing personal morality against the morality that comes

> Is business ethics an oxymoron?

> “Give me the ‘McFacts,’ ma’am, nothing but the McFacts!” So argued the defense attorney for McDonald’s Corporation as she questioned Stella Liebeck, an 81-year-old retired sales clerk, two years after her initial lawsuit against McDonald’s claiming that

> The following relates to the Menendez – Halliburton situation described in the text. (a) How would you characterize Halliburton’s accounting for revenue from ethical and professional perspectives? (b) Once KPMG learned that Menendez had provided a compl

> On October 24, 2013, the Second Circuit Court of Appeals ruled that a tipster who provided information to the SEC about illegal payments to foreign government officials by Stryker Corporation under the Foreign Corrupt Practices Act (FCPA) was not eligibl

> Explain how internal auditors’ sensitivity to ethical dilemmas might be influenced by corporate governance mechanisms.

> Explain how we might evaluate auditors’ whistle-blowing intentions? Why would this be important to do?

> How do the concepts of cognitive dissonance and organizational/ethical dissonance relate to whether an accountant might choose to blow the whistle on corporate wrongdoing?

> Just because a person has a right to blow the whistle, does that mean she has a duty to blow the whistle? How might we make that determination?

> One explanation about rights is that “there is a difference between what we have the right to do and what is the right thing to do.” Explain what you think is meant by this statement. Do you believe that if someone is rude to you, you have a right to be

> Evaluate the ethics of the practice of whistleblowing from the perspectives of virtue, rights theory, and utilitarianism.

> It has been argued that an organization that does not support those that whistle blow because of violation of professional standards is indicative of a failure of organizational ethics. Explain what you think this statement means from the perspective of

> The Committee of Sponsoring Organizations (COSO) explains the importance of the control environment to internal controls by stating that it sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for al

> What is the link between the internal control environment and accountability?

> Brief and Motowidlo define prosocial behavior within the organizational setting as “behavior which is (a) performed by a member of an organization, (b) directed toward an individual, group, or organization with whom she interacts while carrying out her o

> The 2011 National Business Ethics Survey defines “active social networkers” as people who spend more than 30 percent of the workday participating on social networking sites. According to the results of the survey, active social networkers air company lin

> Five months before the new 2002 Lexus ES hit showroom floors, the company’s U.S. engineers sent a test report to Toyota City in Japan: The luxury sedan shifted gears so roughly that it was “not acceptable for production.” Days later, another Japanese exe

> The issue of the size of executive compensation packages is explored in the text. The highest paid CEO in 2014 was David Zaslav, the CEO of Discovery Communications, whose total executive compensation package was $156.1, the vast majority of which was fr

> In her book The Seven Signs of Ethical Collapse, Jennings explains: “When an organization collapses ethically, it means that those in the organization have drifted into rationalizations and legalisms, and all for the purpose of getting the results they w

> In teaching about moral development, instructors often point out the threefold nature of morality: It depends on emotional development (in the form of the ability to feel guilt or shame), social development (manifested by the recognition of the group and

> In this chapter, we have discussed the Joe Paterno matter at Penn State. Another situation where a respected individual’s reputation was tarnished by personal decisions is the resignation of David Petraeus, former U.S. military general and head of the Ce

> In the text, we point out that Rest’s model is not linear in nature. An individual who demonstrates adequacy in one component may not necessarily be adequate in another, and moral failure can occur when there is a deficiency in any one component. Give an

> In his research into the components of ethical decision making, Rest raised the following issue: Assuming someone possesses sound moral reasoning skills, “Why would they ever chose the moral alternative, especially if it involves sacrificing some persona

> Using the child abuse scandal at Penn State discussed in Chapter 1, explain the actions that would have been taken by Joe Paterno if he had been reasoning at each stage in Kohlberg’s model and why.

> One reason otherwise good people may do bad things is what psychologists call scripts. This term refers to the procedures that experience tells us to use in specific situations. Unlike other forms of experience, scripts are stored in memory in a mechanic

> In the debate over why good people do bad things, Tenbrunsel suggests that people are often blind to the ethical dimensions of a situation, a concept he refers to as “bounded ethicality.” Craig Johnson addresses moral disengagement by saying: When others

> A major theme of this chapter is that our cognitive processes influence ethical decision making. Use the theme to comment on the following statement, which various religions claim as their own and has been attributed to Lao Tzu and some say the Dalai Lam

> Explain what you think each of the following statements means in the context of moral development. a. How far are you willing to go to do the right thing? b. How much are you willing to give up to do what you believe is right? c. We may say that we would

> The nature of accountants’ work puts them in a special position of trust in relation to their clients, employers, and the general public, who rely on their professional judgment and guidance in making decisions. Explain the link between professional judg

> Windsor and Kavanagh propose in a research study that client management economic pressure is a situation of high moral intensity that sensitizes auditors’ emotions and thus motivates their moral reasoning to make deliberative decisions either to resist o

> Emotional self-awareness refers to understanding your own feelings, what causes them, and how they impact your thoughts and actions. It is widely known that ethical dilemmas involving other employees/managers are inherently emotional. Researchers have fo

> 1. Do you think it is the same to act in your own self-interest as it is to act in a selfish way? Why or why not? 2. Do you think “enlightened self-interest” is a contradiction in terms, or is it a valid basis for all actions? Evaluate whether our laisse

> Explain why the process of ethical decision making depends on a number of moral, social, psychological, and organizational factors.

> On October 15, 2009, in Fort Collins, Colorado, the parents of a six-year-old boy, Falcon Heene, claimed that he had floated away in a homemade helium balloon that was shaped to resemble a silver flying saucer. Some in the media referred to the incident