Rule 10b-5 is a regulation created under the Securities and Exchange Act of 1934 that targets securities fraud. Explain how the provision is applied in determining whether fraud has occurred including when earnings management is the underlying motivation for the fraud.
> Organizational culture can influence moral behavior. Explain how this might work and lead to a defense of subordinates’ behavior we might call “They made me do it.”
> Explain the role of integrity in workplace ethics.
> Schilit describes a variety of financial shenanigans. What is the purpose of using those techniques? Would you call it gimmickry? Explain.
> Review the facts related to the reporting of financial statement fraud by Tony Menendez at Halliburton. In commenting on his actions, Menendez said one reason for bringing a claim under SOX was to be proven right about his views on the premature recognit
> Given the requirements of the Dodd-Frank Act to receive an award, what factors should a potential whistleblower consider before blowing the whistle to the SEC on financial wrongdoing from an ethical reasoning perspective.
> Should whistleblowers be allowed to use confidential company documents to expose fraud and other illegality? Use the ruling in Erhart v. BofI Holdings to guide the discussion.
> Do you believe the U.S. Supreme Court decision in Digital Realty Trust, Inc. v. Somers was the “right” decision? Explain the basis for your answer from a whistleblower’s perspective.
> An important factor in an individual's decision whether to become a whistleblower is their sense of duty and loyalty. Imagine a CPA discovers that their supervisor is committing fraud to make the company's financial statements appear better than they rea
> How do the concepts of cognitive dissonance and organizational/ethical dissonance that was discussed in Chapter 2 relate to whether an accountant might choose to blow the whistle on corporate wrongdoing?
> How does the Sarbanes-Oxley Act seek to create an ethical organization culture?
> While on a lunch break following a dispute with a supervisor, an employee updated her Facebook status to an expletive and the name of the employer’s company. Several coworkers “liked” her status. She later posted that the employer didn’t appreciate its e
> 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
> How do you assess at what stage of moral development in Kohlberg’s model you reason at in making decisions? Do you believe your level of reasoning is consistent with what is expected of an accounting professional? How does the stage you indicate relate t
> Discuss the revenue recognition and internal control challenges when a company uses cloud computing.
> Do you believe all sexual relationships should be forbidden in the workplace? Use ethical reasoning to support your view.
> 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
> Explain how an overconfidence bias might influence an auditor’s judgment about the proper balance sheet value of inventory.
> How do reasons and rationalizations of GVV influence the culture of the organization?
> Sharon Watkins regrets not taking more action back in 1996 when she first concluded that Enron’s accounting might not be in accordance with GAAP. Please explain how GVV training might have helped her bring the matter to a successful resolution at that t
> One expression in particular seems to sum up why the accounting frauds at companies such as Enron, WorldCom, and HealthSouth were allowed to persist for so long: “If I Do It, I Must Do It Again.” Explain what is meant by this statement in the context of
> Mark Twain once said, “If you tell the truth, you don’t have to remember anything.” Explain what you think Twain meant by this statement and how it addresses one’s character.
> Consider the ethical principle of praising the good and ignoring the bad. Is this a good way to foster ethical behavior?
> Why do bad things sometimes happen to good people? Does this mean they are a bad person?
> Do you think a CPA can justify allowing the unethical behavior of a supervisor by claiming, “It’s not my job to police the behavior of others?”
> The SEC’s new rules on posting financial information on social media sites such as Twitter means that companies can now tweet their earnings in 280 characters or less. What are the problems that may arise in using a social media platform to report key fi
> Assume that a CFO asks you, as the accountant for the company, to omit certain financial figures from the balance sheet that may paint the business in a bad light. Because the request does not involve a direct manipulation of numbers or records, would yo
> One morning a student telephones her professor that she won't be able to take a scheduled exam because her car broke down on the way home from an out-of-town trip. She asks to take it at another time. What would you do if you were the professor and why?
> Do you think the "Resolution of Ethical Issues" section in The IMA Statement of Ethical Professional Practice is a helpful part of its ethical standards?
> Why do you think good people sometimes do bad things? Explain.
> MacIntyre, in his account of Aristotelian virtue, states that integrity is the one trait of character that encompasses all the others. How does this relate to the Principles in the AICPA Code of Professional Conduct?
> Explain the components of Burchard’s Ethical Dissonance Model and how it describes the ethical person-organization fit at various stages of the contractual relationship in each potential fit scenario. Assume a Low Organizational Ethics, High Individual E
> What does the term "civility" mean to you? Do you think it is civil behavior to shout down a speaker with whom you do not agree? What about cancelling someone because you don't agree with their message?
> Answer the following with regard to egoism. (a) Do you think it is the same to act in your own self-interest as it is to act in a selfish way? (b) Do you think “enlightened self-interest” is a contradiction in terms, or is it a valid basis for all action
> David Starr Jordan (1851–1931), an educator and writer, said, “Wisdom is knowing what to do next; virtue is doing it.” Explain the meaning of this phrase as you see it.
> What is the comparative negligence defense? When can it shield auditors from legal liability for their actions?
> Tinseltown Construction just received a $2.6 billion contract to construct a modern football stadiumfor the L.A. Rams and San Diego Chargers at the L.A. Sports and Entertainment District. The company estimates that it will cost $1.8 billion to construct
> Describe the possible entities that may sue an auditor and the possible reasons for a lawsuit.
> Is there a difference between an error in financial statements, fraud, and negligence from a reasonable care perspective? Give examples of each of your response. How would these events affect accountants’ legal liability?
> During a particularly stimulating lecture by your accounting ethics professor on accountants’ legal liabilities, the following question was posed: Assume you are a CPA and have just been sued by a third-party for your failure to conduct a proper audit. W
> Under what circumstances might an auditor be held legally liable for negligent representation versus a fraudulent misrepresentation based on court rulings discussed in the chapter? Include in your discussion the tests for reliance on misrepresentations.
> Explain how the intent requirement of the legal principle of scienter relates to ethical standards of behavior discussed in previous chapters.
> Distinguish between the legal standards of gross negligence and fraud.
> How does auditors’ meeting public interest obligations relate to avoiding legal liability?
> How has the Sarbanes-Oxley Act affected the legal liability of accountants and auditors?
> Do you believe the standard for liability under the PSLRA better protects auditors from legal liability than the standards which existed before the Act was adopted by Congress? Explain.
> Danny Boy, a local CPA who owns a tax practice, is being investigated by the IRS for the preparation of false income tax returns for a client. The IRS alleges that the individual taxpayer/client used a substantial amount of his company’s funds for person
> Revenue recognition in the Xerox case called for determining the stand-alone selling price for each of the deliverables and using it to separate out the revenue amounts. Why do you think it is important to separate out the selling prices of each element
> What must a plaintiff assert in a Section 11 claim under the Securities Act of 1933 to properly allege an “opinion” statement is materially misleading? When might certain financial statement items constitute “opinions”?
> Distinguish between the legal standards of negligence and recklessness.
> Explain how the quality of corporate governance, risk management, and compliance systems are critical in controlling financial restatement risk within organizations.
> Explain how restatements due to operational issues can trigger restatements.
> Explain how errors in accounting and reporting can trigger restatements.
> Distinguish between big R and little r restatements. What is required of management and the external auditors when such events occur?
> Assume the auditor has determined that prior financial statements need to be restated. What disclosures and other information should be communicated to shareholders, investors, and creditors about this matter?
> It has been said that “Businesses don’t fail – Leaders do.” Explain what this means.
> When should financial statements be restated?
> What is the purpose of using financial analysis to spot earnings management?
> Assume you are asked in an interview: Give me one word that describes you best? Then, explain why it is important in effective leadership. What would you say?
> Describe the role of professional judgment in ethical leadership as it pertains to accountants and auditors and the link to their moral role in society.
> On August 15, 2017, the SEC completed an Administrative Hearing process initiated by a PCAOB investigation of KPMG, LLP and one of their audit partners John Riordan, CPA1 for conducting a materially deficient audit of Miller Energy Resources Inc. KPMG be
> Billy Muldoon, CPA and CFO, just finished reading a preliminary draft of his company’s annual audit report from Local CPAs, LLC. He was concerned that the CPA firm plans to issue a qualified audit report because it had concluded that the company had a ma
> Alexion is a global biopharmaceutical company whose shares are traded on the Nasdaq Stock Market in the U.S. The company develops and sells drugs for patients with life-threatening rare and ultra-rare diseases. Alexion began commercial sales of its first
> When financial results aren’t what they seemed to be – and a company is forced to issue material financial restatements –should it be required to develop policies to claw back incentive pay and bonuses that were awarded to senior managers on the basis of
> Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money to the client is likely to
> On December 13, 2012, Vertical Pharmaceuticals Inc. and an affiliated company sued Deloitte & Touche LLP in New Jersey state court for alleged accountant malpractice, claiming the firm’s false accusations of fraudulent conduct scrapped Trigen Laboratorie
> In the 2007 case of Paul V. Anjoorian v. Arnold Kilberg & Co., Arnold Kilberg, and Pascarella & Trench, the Rhode Island Superior Court ruled that a shareholder can sue a company’s outside accounting firm for alleged negligence in the preparation of the
> QSGI, Inc., is in the business of purchasing, refurbishing, selling, and servicing used computer equipment, parts, and mainframes. During its 2008 fiscal year (FY) and continuing up to its filing for Chapter 11 bankruptcy on July 2, 2009 (the “relevant p
> Joker & Wild LLC has just been sued by its audit client, Canasta, Inc., claiming the audit failed to be conducted in accordance with generally accepted auditing standards, lacked the requisite care expected in an audit, and failed to point out that inter
> Helen Roberts is reviewing two transactions recorded by her client, Biotechnologies (Biotech), as part of her accounting firm’s annual audit of the client for the December 31, 2021, financial statements. She knows Biotech is under pressure to maximize re
> Your tax client, Steve Michaels, told you that his former accountant who prepared his annual tax returns made errors that resulted in him suffering more than $100,000 in losses. Apparently, the errors involved adjustments to his income for a loss resulti
> In Chapter 4 we discussed the artificial tax shelter arrangements developed by KPMG LLP for wealthy clients that led to the settlement of a legal action with the Department of Treasury and the Internal Revenue Service. On August 29, 2005, KPMG admitted t
> One of the earliest frauds during the late 1990s and early 2000s was at Sunbeam. The SEC alleged in its charges against Sunbeam that top management engaged in a scheme to fraudulently misrepresent Sunbeam’s operating results in connecti
> On March 4, 2009, the SEC reached an agreement with Krispy Kreme Doughnuts, Inc., and issued a cease-and-desist order to settle charges that the company fraudulently inflated or otherwise misrepresented its earnings for the fourth quarter of its FY2003 a
> What are financial statement restatements?
> On June 12, 2017, GE announced that 30-year GE veteran and current President and CEO of GE Healthcare John Flannery would be replacing Jeff Immelt as CEO of the company as of August 1, 2017. Immelt had been the CEO for 16 years, taking over that role fro
> The Kraft Heinz Co. case was discussed in the chapter. To refresh your memory, on May 6, 2019, Kraft Heinz disclosed that it would restate its financial statements due to faulty procurement practices. The financial statements for 2016, 2017, and the firs
> Monsanto is an agricultural seed and chemical company that manufactures and sells glyphosate, an herbicide, under the trade name “Roundup.” Roundup historically was one of Monsanto’s most profitable products, and the company sells it to both retailers an
> Jeremy Strong, CPA was recently hired as the new CFO of Imageware Consolidated (IC) a small publicly owned company. This is Jeremy’s first job outside of public accounting, leaving Deloitte after ten years, where he rose in the ranks to senior audit and
> Meredith Merriweather, CPA is the CFO of Trego Bikes and Trikes (TBT), a manufacturer of Bicycles ranging from tricycles to high end racing bikes. The company has good market penetration and has seen a very stable demand for its bikes over the last few y
> The story of Theranos, a company that sought to make blood tests cheaper, is a cautionary tale for Silicon Valley about what can happen when a company fails to develop internal control systems or overrides them, and when the CEO creates a psychological c
> You just became the new external auditor of a large public company that carries freight throughout the world. You just began to audit the 2021 financial statements and have come across a transaction that occurred in 2020 that would materially change the
> The North Face, Inc. (North Face) is an American outdoor product company specializing in outerwear, fleece, coats, shirts, footwear, and equipment such as backpacks, tents, and sleeping bags. North Face sells clothing and equipment lines catered toward w
> The SEC bought an action against BMW NA for inaccurate disclosures of its retail vehicle sales volume in the United States. In order to close the gap between actual retail sales volume and internal retail sales targets, and in an effort to publicly maint
> According to an October 16, 2017, article by Richard Clough of Bloomberg News,1 General Electric reported earnings per share of $.28, $.13, $.19 and $.15 for the quarter ending September 30, 2017, on an earnings call. Yes, you read that correctly, GE rep
> What is the risk of management bias for each earnings judgment and estimate? What safeguards should be in place to mitigate the risk of management bias, if any? What is the external auditor’s role in this process?
> It took a long time but the Securities and Exchange Commission finally acted and held auditors responsible for the fraud that occurred in banks during the financial recession in 2014. Surprisingly to some, the TierOne bank case explained below was the na
> It’s no fun accepting a position for your dream job and then red flags are raised that make you wonder about the culture of the company. Those are the thoughts of Donna Mason on January 18, 2022, as she prepares for a meeting with her a
> The CFO, King Bernard, of Blackswan Petfood, a large publicly traded manufacturer of organic gourmet dog and cat food, is getting ready for the quarterly conference call with major investors and financial analysts in two days. The King has been reviewing
> Exhibit 1 presents the fourth quarter press release of Allergan. Allergan is a global pharmaceutical company and a leader in a new industry model – Growth Pharma. Allergan’s product lines include Botox, Juvederm, Latis
> We can’t recognize revenue immediately, Paul, since we agreed to buy similar software from DSS,” Sarah Young stated. “That’s ridiculous,” Paul Henley replied. &acir
> Winners & Losers, Inc. (WLI) is a Nevada corporation with its principal place of business in Las Vegas. Its business model is to provide electronic sports betting in conjunction with a new law that legalized it in Nevada. The companyâ€
> Weatherford International PLC is a multinational Irish public limited company based in Switzerland, with U.S. offices in Houston, Texas. Weatherford’s shares are registered with the SEC and are listed on the NYSE. Weatherford files peri
> Ronnie Maloney, an audit partner for Forrester and Loomis, a registered public accounting firm in Boston, just received a meeting request from Jack McDuff, the chairman of the audit committee of Digital Solutions, one of his clients. The audit committee
> Diamond Foods, based in Stockton, California, is a premium snack food and culinary nut company with diversified operations. The company had a reputation of making bold and expensive acquisitions. Due to competition within the snack food industry, Diamond
> Maines and Wahlen state in their research paper on the reliability of accounting information: “Accrual estimates require judgment and discretion, which some firms under certain incentive conditions will exploit to report non-neutral accruals estimates wi
> In what some are suggesting is the worst financial reporting fraud since Enron, Wirecard filed for bankruptcy in June of 2020 after admitting that €1.9 billion Euros ($2.1bn U.S.) on its balance sheet (representing roughly 25% of its total assets) probab
> Travis McGee, a Senior Audit Manager for a Big Four Audit, Consulting, Tax and Data Analytics organization, has just spent the last year helping the firm rollout its new Artificial Intelligence (AI) based audit infrastructure. Travis is considered one of
> On January 30, 2018, General Electric (GE) announced that it was taking an after-tax charge of $6.2 billion in the December 31, 2017 financial statements and additional cash funding of $15 billion in statutory capital contributions to its insurance subsi
> Margaret Dairy is a CPA and the managing partner of Dairy and Cheese, a regional CPA firm located in northwest Wisconsin. She just left a meeting with a well-respected regional credit union headquartered in her hometown. Margaret was asked whether her fi
> Richard Lange, CPA, is a sole practitioner. The largest audit client in his office is Echo Park Sportswear (EP Sports). EP Sports is a privately owned company in South Bend, Indiana with a 12-person board of directors. Richard was hired by the audit comm
