The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB). The PCAOB reports to the U.S. Securities and Exchange Commission (SEC). One of the PCAOB’s responsibilities is to audit the accounting firms through practice inspections to ensure that the accounting firms are complying with professional standards of accounting and auditing. In order to ensure the integrity of the audit review process, the PCAOB does not notify the accounting firms in advance about which audit working papers it will inspect and when it will do so. KPMG, one of the Big Four accounting firms, received several PCAOB citations for deficiencies in their audit working papers. In 2013, almost half the audits inspected by the PCAOB had audit deficiencies; the prior year, 34% of the reviewed files had audit deficiencies. However, if an audit firm knew in advance which auditing working papers the PCAOB would inspect, then their files could be amended to “correct” for any shortcomings. Even if KPMG had already released an audit opinion to the client, these corrections would ensure that the working paper files would pass the PCAOB inspection. From 2015 to February 2017, six KPMG partners obtained insider information so that they could revise and improve the audit working paper files to eliminate any audit deficiencies prior to the PCAOB inspection. How did this happen? In May 2015, KPMG hired Brian Sweet, a PCAOB supervisor. Before Sweet left the PCAOB, he down- loaded confidential information including which audit files the PCAOB planned to examine over the next year. He continued to obtain confidential information about future KPMG inspections from Cynthia Holder, a PCAOB inspector who then joined KPMG in July 2015. A third PCAOB inspector, Jeffrey Wada, also acted as a tipster, leaking PCAOB information while he too was seeking a job at KPMG. Meanwhile, as far back as November 2015, KPMG employees cheated on their internal ethics tests. Partners and staff shared answers to mandatory ethics, integrity, and compliance training sessions so that other employees would obtain passing scores. Because these were internal tests, KPMG personnel manipulated the computer that hosted the training exams to lower the passing score. Anyone who answered only 25% of the questions correctly passed the test. On June 17, 2019, KPMG admitted to these two ethical failures and agreed to pay a fine of $50 million. The SEC also requested an independent review of KPMG’s internal ethics and integrity systems. Not everyone was satisfied. Thomas Fox, an independent consultant and lawyer, blogged, “In short, the conduct outlined in the Order is so egregious, detailing a culture which is completely unmoored from any ethical foundation, that any company using KPMG as an auditor must ask some very serious questions about not only the quality of the services they have received but also the very foundation of these services.”1 In a Market Watch interview, Fox asked, “If these partners and staff are willing to lie, cheat and steal to defy the PCAOB and the SEC, what must they be willing to do to please clients and generate more profits?”2 Questions 1. Identify factors that you think contributed to KPMG developing a culture that accepted utilizing insider information and cheating on ethics exams as legitimate business practices. 2. Assess Thomas Fox’s comments about KPMG’s ethical failures. 3. Is there anything the accounting profession could have done to prevent these two ethical failures?
> What three ethics risks must a company guard against, and why?
> Why is an ethical corporate culture important?
> Why should a professional accountant be aware of the Ethics Code of the International Federation of Accountants (IFAC)?
> Why is it important for a professional accountant to understand the ethical trends discussed in this chapter?
> In 1964, at the1 invitation of the Ecuadorian government, Texaco Inc. began operations through a subsidiary, TexPet, in the Amazon region of Ecuador. The purpose of the project was to “develop Ecuador’s natural resources and encourage the colonization of
> Will the NOCLAR standards assist or hurt the accounting profession?
> Is a professional accountant a businessperson pursuing profit or a fiduciary that is to act in the public interest?
> What are the common elements of the three practical approaches to ethical decision making that are briefly outlined in the chapter?
> Why are philosophical approaches to ethical decision making relevant to modern corporations and professional accountants?
> How can conflicts between the interests of stakeholders be resolved by a corporation’s management?
> How can a corporation show respect for its stakeholders?
> Why are the expectations of a corporation’s stakeholders important to the reputation of the corporation and to its profitability?
> The advantage of commission sales is that if the salesperson puts in effort and makes a sale, then both the company and the sales- person benefit. The salesperson receives a commission, and the company receives the proceeds of the sale, net of the commis
> Although the Canadian banks did not suffer as much as other financial institutions around the world, they were not immune from the economic consequences of the subprime mortgage meltdown. In Canada, the earliest crisis concerned the liquidity of asset-ba
> In December 2002, Stan O’Neal became CEO of Merrill Lynch & Co. Inc., the world’s largest brokerage house. Known as “Mother Merrill” to insiders, the firm had a nurturing environment that accepted lower profit margins so that veteran employees could rema
> On April 24, 1985, Warren M. Anderson, the sixty-three-year-old chairman of Union Carbide Corporation, had to make a disappointing announcement to angry stockholders at their annual meeting in Danbury, Connecticut. Anderson, who had been jailed briefly b
> American International Group, Inc. (AIG) was the world’s largest insurance company with major offices in New York, London, Paris, and Hong Kong. From 2005 to 2008, the company had a series of accounting problems. First, it was convicted of fraudulent fin
> During the depths of the subprime lending crisis in 2008, a major U.S. investment banking firm, Goldman Sachs, required a $10 billion bailout from the U.S. government’s Troubled Asset Relief Pro- gram (TARP) to stay afloat. But in 2009, Goldman’s fortu
> On September 15, 2008, Lehman Brothers Holdings Inc., one of the world’s most respected and profitable investment banks, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in the Southern District of New Yo
> Short selling occurs when a seller borrows shares from a brokerage house and then sells those shares. At a later date, the seller buys the shares and delivers them to the brokerage house. If the price falls during the shorting period, then the short sell
> Allegations of serious impropriety and perhaps illegality surrounding Goldman Sachs’s contribution to the 2008 financial crisis have been well publicized. Allegations included trading for their own benefit directly against the interests of its clients (e
> In 2007, Danske Bank, Denmark’s largest bank, bought Finland’s Sampo Bank, which had a tiny branch office in Tallinn, Estonia. From 2007 until 2015, €200 billion of suspicious money flowed through the Tallinn branch, approximately ten times the gross dom
> Headquartered in London, Barclays is an investment and financial services bank with operations throughout the world. In December 2015, Barclays hired Jes Staley as CEO. Previously, Staley had been a 30-year veteran with JP Morgan in its investment bankin
> Assume that you have just been placed in charge of the Claims Investigation Unit of a small insurance company based in Minneapolis. Your personnel department has provided the following details on your personnel. However, because your insurance company is
> On May 17, 2010, a federal jury in New York decided that Novartis, a Swiss- headquartered drug company, was guilty of discriminating against women and should pay the twelve women plaintiffs who testified in the trial $3.37 million in compensatory damages
> In October 2008, Jill Hubley, a former senior strategist in the Dell Americas human resource group, a Dell Inc. division located in Texas, filed a lawsuit against the world’s second-largest maker of personal computers. She alleged that Dell had systemati
> The bottled water industry is lucrative and expanding, especially in the United States, where it has been growing steadily since 2010, reaching 11 billion gallons in 2014.1 This upward trend is likely to continue as health conscious consumers opt for wat
> In March 1994, six African Americans employed at Texaco Inc.1 filed a class action lawsuit on behalf of 1,400 current and former African American employees. They alleged that Texaco had systematically discriminated against them in terms of promotions and
> In essence, cruise ships are floating small towns. They carry thousands of passengers on ships that often stand thirteen decks tall. The cruise ship industry that travels from Washington State to Alaska contributes billions of dollars into the economies
> Lynn James was in the vortex of a set of crises. Lynn, an entrepreneur and the president, CEO, and 75% owner of Wind River Energy Inc., was one week away from closing a deal to secure much-needed financing for existing and new operations via an independe
> Society is quite concerned about the level of greenhouse gases that are being emitted by various businesses. Many firms are responding by becoming more candid about the effects that their operations are having on the planet. Some are reporting this infor
> According to the Greenpeace Web page, On 16 February last year (1995), Greenpeace learned that the U.K. government had granted permission for Shell Oil to dump a huge, heavily contaminated oil installation, the 14,500 tonne Brent Spar, into the North Atl
> Shortly after midnight on March 24, 1989, the oil tanker Exxon Valdez ran aground on Bligh Reef in Alaska’s Prince William Sound, spilling 11 million gallons of crude oil. Ecological systems were threatened, and the lives and livelihood of area residents
> A two-month-old child was accidentally given a drug overdose at a Texas hospital despite the fact that seven health care professionals reviewed the prescription order before the drug was given to the baby. The following excerpts from a New York Times art
> In 2000,1 Toyota had a strong and growing reputation for quality. Its engineering excellence was peaking with the worldwide introduction of the first successful commercially available hybrid, the Prius, in 2001. But by 2010, over 10 million individual re
> BP has had a record of mishaps affecting life, the environment, and the property of the company and other stakeholders. On October 26, 2010, the Public Broadcasting System (PBS) in the United States aired a fifty-three-minute TV documentary titled The Sp
> In its own Internal Investigation,1 released on September 8, 2010, BP provided its analysis of why the Deepwater Horizon oil rig exploded, precipitating one of the largest oil spills the world has ever seen. Eleven oil rig crew members were killed and se
> On July 16, 2008, it was announced that several Chinese producers of baby milk powder had been adding melamine, a chemical usually used in countertops, to increase the “richness” of their milk powder and to increase the protein count. Shockingly, the mel
> South Africa and the drug companies have changed forever,” say David Pilling and Nicol degli Innocenti.1 South Africa is to the drug pharmaceutical industry what Vietnam was to the U.S. military. Nothing will be quite the same again. That, at least, is t
> Harold Johns found himself in jail in Germany. He was a vice president of Baranca Industries Inc., a U.S. firm that constructs and installs factory equipment. Unfortunately, he was the highest-ranking Baranca official in Germany while he was in Germany o
> Walt1 Pavlo joined MCI in 1992 and rapidly became second in command at the company’s finance or long-distance collections unit, as is documented in the ethics case “Manipulation of MCI’s Allowance for Doubtful Accounts” in Chapter 5. Walt left MCI in 199
> A cryptocurrency, such as a Bitcoin, is a digital commodity that can be used in financial transactions. Unlike the U.S. or Canadian dollar, cryptocurrencies have no government backing. It is worth only what another person will pay for it. A crypto- curre
> Harry Potter is known to tens of millions of readers as a figment of J. K. Rowling’s imagination. One of the good guys, he is a gifted apprentice magician and budding wizard. Harry and his pals have bested evil wizards in tale after tale and many movies,
> Assume that you are a professional accountant who is CFO of a medium-sized manufacturing company that plans to do the following: • Misrepresent products that come from environmentally irresponsible sources as environmentally friendly. • Bribe officials o
> In 1984, twenty-three-year-old Wanda Liczyk received her designation as a chartered accountant. The following year, she left Coopers & Lybrand (now part of PricewaterhouseCoopers) to become a budget analyst for the City of North York. By 1991, she had be
> Martin Pilzmaker was a young, aggressive lawyer from Montreal who was invited in 1985 to join the law firm Lang Michener in Toronto. It was expected that his immigration law practice “could enrich the (firm’s) coffers by $1 million a year catering to the
> Livent, once the world’s premier live entertainment companies, was sold in 1998 to buyers who soon found that the value they had paid for was an illusion. Livent had thrilled audiences with performances of Phantom of the Opera, Ragtime, Kiss of the Spide
> On July 1, 2013, Scott London, a former KPMG audit partner, pleaded guilty to securities fraud. He had been passing information to his friend, Bryan Shaw, over a two-year period ending in 2012. He told his friend about earnings announcements by Herbalife
> Google is the world’s largest search engine. In 2009, it had approximately 400 million Web users, of which 200 million are located in the United States. Its global revenue from advertising amounted to $23.6 billion. China is the world’s third-largest eco
> At the firm, we’ve got a new way of looking at tax issues. It’s called ‘risk management,’ and, in your case, John, it means that we can be more aggressive than in the past. In the past, when there was an issue open to interpretation, we advised you to ad
> Sophia and Maya were having a quiet afterwork drink at the Purple Pheasant around the corner from their office. Both are professional accountants in their late twenties and were talking about their futures in public accounting. “I want to concentrate on
> Before 2002, accounting firms would provide multiple services to the same firm. Hired by the shareholders, they would audit the financial statements that were prepared by management while also pro- viding consulting services to those same managers. Some
> As Bill Adams packed his briefcase on Friday, March 15, he could never remember being so glad to see a weekend. As a senior tax manager with a major accounting firm, Hay & Hay, on the fast track for partnership, he was worried that the events of the week
> The Italian federal corporate tax system has an official, legal tax structure and tax rates just as the U.S. system does. However, all similarity between the two systems ends there. The Italian tax authorities assume that no Italian corporation would eve
> The leak of the Panama Papers in 2016 revealed the existence of hundreds of thou- sands of offshore shell companies used by the world’s wealthy to avoid paying taxes, raised the public’s awareness of advantaged treatment of the wealthy, and led to renewe
> Multinationals are headquartered in one country but have operations worldwide. Generally, each multinational pays income taxes in the jurisdiction in which it generates its profits. For example, a German company with operations in the United States and S
> Multidisciplinary practices are probably an inevitable development. Clients want “one- stop shopping,” at a professional firm where they can go for all their needs, and where the partner responsible for their work can keep them briefed on new services th
> Stan Jones was an investor who had recently lost money on his investment in Fine Line Hotels, Inc., and he was anxious to discuss the problem with Janet Todd, a qualified accountant who was his friend and occasional advisor. “How can they justify this, J
> In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used inside information to sell a stock investment to an unsuspecting investing public. That was when her personal friend Sam Waksal was defending himself against SEC
> It’s legal, but is it ethical? For years, a nationally known doughnut chain only sold sugary drinks at its retail outlets on a prominent university campus. Sugar consumption is known to contribute to diseases such as heart disease, tooth decay, diabetes,
> At one time, a well-known communications firm measured all managers at all levels on return on net assets (RONA). Write a report to the firm’s CFO indicating why you believe that the use of a single performance measure for managers at all levels will not
> Consider the following jobs. Identify a nonfinancial performance measure that you would recommend. a. Flight attendant b. Hotel parking valet c. Sports venue ticket-taker d. Bank teller e. Restaurant wait-staff
> Kipling’s Taco Shop was the only establishment serving tacos and other quick bites in a small college town for more than 20 years. Service was limited to the walk-up window, with no delivery and no inside seating. The owner of Kipling’s focused on well-m
> Refer to the information in Exercise 17-43. Required Write a memo to the managers at Crescent Call Centers recommending which variances they should investigate this period along with your reasons. Exercise 17-43: The standard direct labor cost per call
> Refer to the information in Exercise 17-41. Required Write a memo to the senior manager of Oakman Accounting Partners recommending which variances from the past year the firm should investigate along with your reasons. Exercise 17-41:
> Gerisch Consolidated sold 21,150 units of its only product last period. It had budgeted sales of 24,300 units based on an expected market share of 25 percent. The sales activity variance for the period is $340,200 U. The industry volume variance was $194
> Refer to the information in Exercise 17-22. Assume that Fischer Fabrication had no beginning finished goods inventory and only produced one product. A count of inventory showed that 4,400 units remained in the warehouse. Required a. Assume Fischer writes
> The River Plant of Carlisle, Inc. produces a particular metal fixture used in aerospace and maritime industries. The following information is available for the last operating month: ∙ The plant produced and sold 27,600 fixtures for $72
> The (partial) cost sheet for the single product manufactured at Briarcliff Corporation follows: The master budget level of production is 45,000 direct labor-hours, which is also the production volume used to compute the fixed overhead application rate. O
> Refer to the information in Exercises 16-38 and 16-39. Required What are the fixed overhead price and production volume variances for Golden Food Products? Exercise 16-38: Exercise 16-39:
> When would you advise a firm to use direct intervention to set transfer prices? What are the disadvantages of such a practice?
> Annland Components applies fixed overhead at the rate of $5.10 per unit. For October, budgeted fixed overhead was $513,825. The production volume variance amounted to $3,825 favorable, and the price variance was $12,750 unfavorable. Required a. What was
> Coe Parts applies fixed overhead at the rate of $6.80 per unit. Budgeted fixed overhead was $197,200. This month 28,120 units were produced, and actual fixed overhead was $192,100. Required a. What are the fixed overhead price and production volume varia
> Rankin Fabrication reports the following information with respect to its direct materials: Rankin Fabrication holds no materials inventories. Required a. Prepare a short report for Rankin’s management showing direct materials price and
> Refer to the information in Exercises 16-38 and 16-39. During the year, the company purchased 320,000 pounds of material and employed 32,500 hours of direct labor. Required a. Compute the direct materials price and efficiency variances. b. Compute the di
> Golden Food Products produces special-formula pet food. The company carries no inventories. The master budget calls for the company to manufacture and sell 120,000 cases at a budgeted price of $60 per case this year. The standard direct cost sheet for on
> Engleside Components produces testing equipment for medical devices. Recently, one of the company’s usual suppliers was unable to fill an order, so the purchasing manager chose a supplier who had been approved. The price was significantly higher than the
> Selected data for March for Irvington, Inc. follow. The variable material sales activity variance is $21,600 U. Required a. How many units were budgeted for March in the master budget? b. Recreate the master budget for March.
> The following data are available for the most recent year of operations for Prest Products. The revenue portion of the sales activity variance is $225,000 U. Required a. How many units were actually sold in the most recent period? b. Prepare a sales acti
> The Main Street plant controller at Nowak Enterprises sends you the following graph to explain the plant’s costs. Required Given the data shown in the graph, determine the following: a. Budgeted fixed cost per period. b. Budgeted variab
> Burdeno Appliances has two divisions, Sales and Financing. Sales is responsible for selling Burdeno’s inventory and maintaining inventory for future sale. Financing Division takes loan applications, packages loans into pools, and sells them in the financ
> What are the limitations of market-based transfer prices? What are the limitations of cost based transfer prices?
> Refer to the information in Exercise 15-36. Suppose Manufacturing is located in Country X with a tax rate of 35 percent and Marketing in Country Y with a tax rate of 15 percent. All other facts remain the same. Required a. Current output in Manufacturing
> Refer to the information in Exercise 15-24. Assume there is no special order pending. Required a. What transfer price would you recommend for Hamlet Industries? b. Using your recommended transfer price, what will be the income of the two divisions, assum
> Anstell Corporation operates a Manufacturing Division and a Marketing Division. Both divisions are evaluated as profit centers. Marketing buys products from Manufacturing and packages them for sale. Manufacturing sells many components to third parties in
> Refer to the information in Exercise 15-34. Suppose Production is located in Country A with a tax rate of 30 percent and Distribution in Country B with a tax rate of 10 percent. All other facts remain the same. Required a. Current output in Production is
> Carol Components operates a Production Division and a Packaging Division. Both divisions are evaluated as profit centers. Packaging buys components from Production and assembles them for sale. Production sells many components to third parties in addition
> Cascade Containers is organized into two divisions—Manufacturing and Distribution. Manufacturing produces a product that can be sold immediately or transferred to Distribution for further processing and then sold. Distribution only buys from Manufacturin
> Refer to the data in Exercise 15–26. Suppose that Civic Division will charge the client interested in implementing a costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Civi
> Whitehill Chemicals has two operating divisions. Its Formulation Division in the United States mixes, processes, and tests basic chemicals, and then ships them to Ireland, where the company’s Commercial Division uses the chemicals to produce and sell var
> Hardyke Group operates a local after-school recreation and activities program. The Education Department is a state governmental agency. Hardyke has an agreement with the Department to provide services to students in need for a nominal $1 per day, to be p
> Pilgrim Logistics operates a network of delivery vans. Pilgrim allows its decentralized units (divisions) to “rent” vans to another Pilgrim division. Commercial Division has leased some of its idle vans to Retail Division for $450 per month. Recently, Co
> How can ratios, such as ROI, be used for control as well as performance evaluation?
> Lola Metals has two decentralized divisions, Stamping and Finishing. Finishing always has purchased certain units from Stamping at $36 per unit. Stamping plans to raise the price to $48 per unit, the price it receives from outside customers. As a result,
> Lamothe Solutions is a management consulting firm. Its Business Division advises firms on the adoption and use of financial systems. Civic Division consults with state and local governments. Civic Division has a client that is interested in implementing
> Refer to the data in Exercise 15-24. Assume the transfer price is unchanged from the current transfer price. Required a. Does Hamlet Industries want to accept this order? b. Will the Distribution Division manager be willing to accept this order? c. Will
> Hamlet Industries is organized into two divisions, Fabrication and Finishing. Both divisions are considered to be profit centers, and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is ma
> Refer to the data in Exercise 14-45. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI. Required a. Compute ROI, using net book value. b. Compute ROI, using gross book value. c. If you worked Exercise 14-39
> Refer to the information in Exercises 14-40 and 14-41. Required a. What is the division’s residual income before considering the project? b. What is the division’s residual income if the asset is purchased? c. What is the division’s residual income if th
> Refer to the data in Exercise 14-37. Required Evaluate the performance of the two divisions assuming Houghton Chemicals uses economic value added (EVA). Exercise 14-37:
