Question: Values-driven leadership as envisioned in the

> A member of the audit team of Ernst & Young in Canada became concerned about the accounting for inventory by its Canadian client, Sino-Forest, a Chinese company in the forestry business and headquartered in Ontario province. He sent an e-mail to the mana

> 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 connection with a purporte

> Do you think there are any circumstances when you should go outside the company to report financial wrongdoing? If so, to what person/organization would you go? Why? If not, why would you not take the information outside the company?

> 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. Surprisingly to some, the TierOne bank case explained below was the nation’s f

> Background For years, Dell’s seemingly magical power to squeeze efficiencies out of its supply chain and drive down costs made it a darling of the financial markets. Now we learn that the magic was at least partly the result of a huge financial illusion.

> 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, 2016, as she prepares for a meeting with her accounting supervis

> Back on January 16, 2003, after more than 23 years, General Electric (GE) Co. decided to dump its well-recognized slogan, “We Bring Good Things to Life,” and decided to spend more than $100 million to launch a new campaign with the tagline, “Imagination

> 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. “Get your head out of the sand, Sarah, before it’s too late.” Sarah Young is the controller for

> Beazer Homes is a home-building company headquartered in Atlanta, Georgia. Its stock is listed on the New York Stock Exchange. Beazer is required to file Form 10-Q and Form 10-K, as well as an 8-K form when certain changes occur, such as restating financ

> Canada-based Nortel Networks was one of the largest telecommunications equipment companies in the world prior to its filing for bankruptcy protection on January 14, 2009, in the United States, Canada, and Europe. The company had been subjected to several

> Satyam Computer Services, now Mahindra Satyam, is an India-based global business and information technology services company that specializes in consulting, systems integration, and outsourcing solutions. The company was the fourth-largest software expor

> Con-way is a Delaware corporation headquartered in San Mateo, California. It is an international freight transportation and logistics services company that conducts operations in a number of foreign jurisdictions. During the relevant period, the company

> Kirsten had her dream job, combining her love of accounting with traveling. She’d just had a big promotion to Director of International Accounting for Getaway Cruise Lines. As the director in the Houston office, she was currently overseeing final contrac

> In the discussion of loyalty in this chapter, a statement is made that “your ethical obligation is to report what you have observed to your supervisor and let her take the appropriate action.” We point out that you may want to take your concerns to other

> 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 a public company’s

> 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

> Paul Lewis is the quality review partner on the Richards & Co. engagement. He was reviewing the workpapers prior to the December 31, 2015, annual audit when he came across transactions that caused him a great deal of concern. He wondered if the firm’s au

> The facts of this case and names of main characters have been changed to focus on specific ethical and professional obligations. Heinrich Müller had always been a team player. His many years at one of the Big Four firms taught him to be loyal, even to a

> Background On November 20, 2012, Hewlett-Packard (HP) disclosed that it discovered an accounting fraud and has written down $8.8 billion of the value of Autonomy, the British software company that it bought in 2011 for $11.1 billion, after discovering th

> Auditors are not always found guilty of negligence, gross negligence, and fraud when lawsuits are filed against them. And they do not always settle lawsuits to avoid costly, protracted litigation. A good example is legal action taken against three accoun

> Ahold is a publicly held company organized in the Netherlands with securities registered with the SEC pursuant to Section 12(B) of the Exchange Act. Ahold’s securities trade on the NYSE and are evidenced by American Depositary Receipts (ADRs). Today its

> Bill Young felt uneasy but good about downloading hundreds of pages of documents about Infant Products Inc., an audit client of his CPA firm, Rogers & Autry, which involved the bribery of foreign government officials to gain favored treatment—a crime und

> 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

> Assume in the DigitPrint case that the venture capitalists do not provide additional financing to the company, even though the accrued expense adjustments have not been made. The company hires an audit firm to conduct an audit of its financial statements

> Barry Yellen, CPA, is a sole practitioner. The largest audit client in his office is Rooster Sportswear. Rooster is a privately owned company in Chicken Heights, Idaho, with a 12-person board of directors. Barry is in the process of auditing Rooster’s f

> Jamie Keller was pleased with his new job position as director of international consolidation for Gamma Enterprises. Gamma Enterprises was a consolidation of high-tech gaming companies, with subsidiaries of Alpha, Beta, Gamma, Delta, and Epsilon. This pa

> Romello Accounting LLP is a small CPA firm consisting of three partners and seven other professional staff. The firm offers full attestation and assurance services. Most of the work is for small and medium-sized nonpublic companies. The firm is registere

> Bill Stanley, of Jacobs, Stanley & Company, started to review the working paper files on his client, Imperial Valley Community Bank, in preparation for the audit of the client’s financial statements for the year ended December 31, 2016. The bank was owne

> The story of ZZZZ Best is one of greed and audaciousness. It is the story of a 15-year-old boy from Reseda, California, who was driven to be successful, regardless of the costs. His name is Barry Minkow. Although this case dates back over 30 years, it do

> The Groupon case was first discussed in Chapter 3. Here, we expand on the discussion of internal controls and the risk of material misstatement in the financial statements. Groupon is a deal-of-the-day recommendation service for consumers. Launched in 2

> Ethan Lester was seen as a “model employee” who deserved a promotion to CFO, according to Kelly Fostermann, the CEO of Fostermann Corporation, a Maryland-based, largely privately held company that is a prominent global designer and marketer of stereophon

> In a bizarre twist to a bizarre story, on October 22, 2013, Deloitte agreed to pay a $2 million penalty to settle civil charges—brought by the Public Company Accounting Oversight Board (PCAOB)—that the firm violated federal audit rules by allowing its fo

> How does one go from whistleblower to being charged by the SEC for participating in a scheme from mid-2000 to mid-2002 to overstate online revenue through round-trip transactions over two years while being the CFO of the America Online (AOL) Division of

> Sue Kolb has been associated with Valley View Hospital in Highlands Ranch, a small town in Colorado. Kolb is a CPA licensed in Colorado and handles the hospital’s financial affairs; she climbed the ladder to CFO after 10 years in the accounting departmen

> Do you think it would be ethical for a CPA to have someone else do for her that which she is prohibited from doing by the AICPA Code of Professional Conduct? Why or why not? Do you think a CPA can justify allowing the unethical behavior of a supervisor b

> Another ethical dilemma deals with a runaway trolley heading for five railway workers who will be killed if it proceeds on its present course. The only way to save these people is to hit a switch that will turn the trolley onto a side track, where it wil

> Yardley, Inc., is a mid-size company in Oklahoma City. It has been struggling the past few years because chemical products it uses in its agricultural production process increasingly have been deemed environmentally unsafe. Yardley’s primary reliance on

> You are a tax manager and work for CPA firm that that performs audits, advisory services, and tax planning for wealthy clients in a large Midwestern city. You just joined the tax department after five years as a tax auditor for the county government. Dur

> Joe Kang is an owner and audit partner for Han, Kang & Lee, LLC. As the audit on Frost Systems was reaching its concluding stages on January 31, 2016, Kang met with Kate Boller, the CFO, to discuss the inventory measurement of one its highly valued produ

> One area of concern for the accounting profession for the past 20 years has been the proliferation of alternative practice structures. Potential problems exist because the audit side of the business may be influenced by the public entity that controls it

> Family Games, Inc., is a publicly owned company with annual sales of $50 million from a variety of wholesome electronic games that are designed for use by the entire family. However, during the past two years, the company reported a net loss due to cost-

> Lance Popperson woke up in a sweat, with an anxiety attack coming on. Popperson popped two anti-anxiety pills, laid down to try and sleep for the third time that night, and thought once again about his dilemma. Popperson is an associate with the accounti

> The audit of KBC Solutions by Carlson and Smith, CPAs, was scheduled to end on February 28, 2016. However, Rick Carlson was uncertain whether it could happen. As the review partner, he had just completed going over the work paper files of the senior audi

> How does the nature of the internal audit function, strength of ethical leadership, and level of moral intensity influence whether an auditor will record questionable and undocumented journal entries?

> Describe the role of professional judgment in ethical leadership as it pertains to accountants and auditors.

> How might moral intensity influence the decisions made by accounting professionals?

> Why is it important for a CPA to promote professional services in an ethical manner? Do you believe it would be ethical for a CPA to advertise professional services using testimonials and endorsements? Why or why not?

> Are accountants and auditors moral agents of corporations and society? Explain.

> Identify three reasons why there may be ethical leadership failures and explain why failed leadership occurs.

> Distinguish between authentic leadership, transformational leadership, and servant leadership. Are all necessary to change individuals and social systems within an organization?

> The American writer, Robert McKee, is quoted as saying, “True character is revealed in the choices a human being makes under pressure.” Explain what you think this means in the context of moral intensity and ethical leadership of organizations.

> Why might a moral person who is not viewed as a moral manager fail to establish an ethical culture in an organization?

> Moral legitimacy refers to the generalized perception or assumption of observers that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, and beliefs. Explain how moral legitimacy might

> Bruns and Merchant found that managers did not agree on the types of earnings management activities that are acceptable. Refer to the definitions of earnings management in Chapter 7. Explain how leadership traits influence how managers might perceive the

> What is the role of leadership in auditor assessments of the likelihood of fraud in the context of the fraud triangle?

> Explain how the circumstances under each of the following might reflect failed leadership by auditors and the audit firm: • Under-reporting of time on an engagement • Premature sign-off on audit procedures • Accepting weak client explanations for account

> Using the concept of justice, evaluate how an auditor would assess the equality of interests in the financial reporting process.

> Audit firms are expected to establish and maintain a system of quality control. PCAOB inspections often cite the lack of quality controls as a deficiency of audit firms. What role does leadership play in developing the kind of quality control system that

> Why do you think studies show that no single factor has a bigger impact on the ethicality of a firm’s culture than the personal examples set by firm leaders?

> How does organizational dissonance influence ethical leadership and decision making?

> Evaluate the moral intensity of the issues faced by Diem-Thi Le in her whistleblowing experience at DCAA.

> How does an auditor’s commitment to the firm, the profession, and to colleagues influence whether she will blow the whistle on financial wrongdoing?

> How might an accounting firm influence whether non–tax practitioners view a contentious issue with a client as having been handled ethically?

> Choose someone from the business or accounting world who you think is an authentic leader and explain why you believe that to be true.

> Comment on the statement that what a company’s income statement reveals is interesting but what it conceals is vital.

> In 2010 LinkedIn reported trade payable obligations totaling $10.8 million in other accrued expenses within accrued liabilities instead of accounts payable. In 2011, note 2 in the 10-K financial statements described the use of accrued liabilities instead

> Needles talks about the use of a continuum ranging from questionable or highly conservative to fraud to assess the amount to be recorded from for an estimated expense. Discuss his concept of a continuum and the choices within a range from an ethical pers

> Distinguish between ethical rights and obligations from the perspective of accountants and auditors.

> Comment on the statement that materiality is in the eye of the beholder. How does this statement relate to the discussion in the chapter of how to gauge materiality in assessing financial statement restatements? Is materiality inconsistent with the notio

> Evaluate the following statements from an ethical perspective: “Earnings management in a narrow sense is the behavior of management to play with the discretionary accrual component to determine high or low earnings.” “Earnings are potentially managed, be

> Evaluate earnings management from a utilitarian perspective. Can earnings management be an ethical practice? Discuss why or why not.

> Relevance and faithful representation are the qualitative characteristics of useful information under SFAC 8. Evaluate these characteristics from an ethical perspective. That is, how does ethical reasoning enter into making determinations about the relev

> Evaluate the following statement: Do the ends of positive organizational consequences justify the means of earnings management?

> In well-governed companies, a sense of accountability and ethical leadership create a culture that places organizational ethics above all else. What role does organizational culture play in preventing financial shenanigans from being used to manage earni

> Big Pharma has been criticized for making deals that may bring harm to shareholder interests. Evaluate the following transaction from earnings management and ethical perspectives: A pharmaceutical drug company agreed to make payments to wholesalers if th

> Explain the meaning of the following two statements and why each may be true: a. Where management does not try to manipulate earnings, there is a positive effect on earnings quality. b. The absence of earnings management does not, however, guarantee high

> The auditor of Beastie Company is reviewing the following client information for the prior year ended December 31, 2015, and all four quarters of 2016. Estimated Accruals in pretax earnings (in millions)   December 12/31/15  Quarter ended 3/31/16 

> In the study of earnings quality by Dichev et al., CFOs stated that “current earnings are considered to be high quality if they serve as a good guide to the long-run profits of the firm.” Discuss how and why current earnings may not be a good barometer o

> How should an accounting professional go about determining whether a proposed action is in the public interest?

> Are the use of non-GAAP financial measures ethical?

> In the Enron case, the company eventually turned to “back-door” guaranteeing of the debt of Chewco, one of its SPEs, to satisfy equity investors. Assume that a $16 million loan agreement required that Enron stock should not fall below $40 per share. If t

> Critics of IFRS argue that the more principles-based standards are not as precise as, and therefore easier to manipulate than, the more rules-based GAAP. The reason for this is that IFRS requires more professional judgment from both auditors and corporat

> Do you agree with each of the following statements? Explain. • EBITDA makes companies with asset-heavy balance sheets look healthier than they may actually be. • EBITDA portrays a company’s debt service ability— but only some types of debt. • EBITDA isn’

> 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 140 characters or less. What are the problems that may arise in using a social media platform to report key fi

> Explain how a company might use the accounting rules for impairment of long-lived assets to manage earnings.

> Tinseltown Construction just received a $2 billion contract to construct a modern football stadium in the City of Industry, located in southern California, for a new National Football League (NFL) team called the Los Angeles Devils of Industry. The compa

> 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

> Safety-Kleen issued a major financial restatement in 2001. The next year, the company restated (reduced) previously reported net income by $534 million for the period 1997–1999. PwC withdrew its financial statement audit reports for those years. Do you b

> Krispy Kreme was involved in an accounting fraud where the company reported false quarterly and annual earnings and falsely claimed that, as a result of those earnings, it had achieved what had become a prime benchmark of its historical performance, that

> According to the 2011 National Business Ethics Survey conducted by the Ethics Resource Center, Generational Differences in Workplace Ethics, a relatively high percentage of Millennials consider certain behaviors in the workplace ethical when compared wit

> 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 Arthur Levitt’s speech that was referred to in the opening quote he also said: “…I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting. Managing may be giving way to manipulation; Integr

> Valley View Manufacturing Inc., sought a $500,000 loan from First National Bank. First National insisted that audited financial statements be submitted before it would extend credit. Valley View agreed to do so and an audit was performed by an independen

> What are the legal requirements for a third party to sue an auditor under Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934? How do these requirements relate to the Hochfelder decision?

> Assume a third party such as a successor audit firm quickly discovers a fraud that the predecessor auditor has overlooked for years. Do you think this provides evidence supporting scienter? Explain.

> Explain the legal basis for a cause of action against an auditor. What are the defenses available to the auditor to rebut such charges? How does adherence to the ethical standards of the accounting profession relate to these defenses?

> Do you think that the provision of nonaudit services for a client with a failed audit is evidence of negligence?

> Distinguish between the legal concepts of actually foreseen third-party users and reasonably foreseeable third-party users. How does each concept establish a basis for an auditor’s legal liability to third parties?

> In this chapter, we discuss problems encountered by the PCAOB in gaining access to inspect workpapers of auditors in U.S. international accounting firms that have Chinese company clients that list their stock in the United States. Explain why these probl