Chapter 3 Te Test st Bank Multiple Choice – Text Questions
1. In the Pinto Pinto case, Ford Ford relied relied on which which approaches approaches to ethical ethical reasonin reasoning g to decide decide on a course of action with respect to the faulty gas tank placement: A. B. . !.
Egoism Egoi sm and and util utilit itar aria iani nism sm Enligh Enlighten tened ed egoi egoism sm and and righ rights ts theory theory Ethica Ethicall legal legalism ism and utilit utilitari ariani anism sm "ust "ustic icee and and right rightss the theory ory
Answer #. Each of the the following following is is an ethical ethical issue issue in in $usiness $usiness e%cept e%cept for: for: A. B. . !.
&onest &onesty y and fairne fairness ss Inde Indepe pend nden ence ce onfli onflicts cts of intere interest st Fraud
Answer B '. (he se)en se)en signs signs of a pending pending ethical ethical collapse collapse include include all $ut A. B. . !.
Pressu Pressure re to to make make num$e num$ers rs *histl *histle$l e$lowi owing ng hotli hotline ne Bigg Bigger er tha than n life life E+ E+ !oing !oing good good in the the commun community ity
Answer B . Frau Fraud d can can $e defi define ned d as: as: A. B. . !.
A deli$erat deli$eratee misrepresent misrepresentation ation to gain an ad)antage ad)antage o)er another party party A co)erco)er-up up of a mistake mistake made in in the financial financial statem statements ents An error error in prepari preparing ng financial financial statements statements All All of of the the a$o) a$o)ee
Answer A . (he moti)ating moti)ating factor factor for for /ears to charge charge customers customers for repair repairss that were were not needed needed was: A. o)er a loss loss from from its its $usiness $usiness operati operations ons
B. 0reed . Build up certain segments of its $usiness !. All of the a$o)e Answer B . In the Ethical !issonance 2odel, a high person-organi3ation fit re4uires: A. B. . !.
&igh organi3ational ethics, low indi)idual ethics &igh organi3ational ethics, high indi)idual ethics 5ow organi3ational ethics, high indi)idual ethics 5ow organi3ational ethics, lows indi)idual ethics
Answer B or ! 6. Assume you are an ethical person and feel uncomforta$le a$out the way your company is reporting earnings. 7ou $elie)e it is deli$erately o)erstated. If you want to $ring your concerns to upper management, in which person-organi3ation fit is it most likely that you will do so8 A. B. . !.
&igh organi3ational ethics, low indi)idual ethics 5ow organi3ational ethics, high indi)idual ethics 5ow organi3ational ethics, low indi)idual ethics &igh organi3ational ethics, high indi)idual ethics
Answer !
9. A uni4ue aspect of occupational fraud is: A. B. . !.
(he misuse of company assets (he falsification of financial statements (he failure to disclose full and complete information All of the a$o)e
Answer A . According to the #;1# 0lo$al Fraud /tudy of the AFE, which fraud scheme posed the greatest risks to organi3ations throughout the world: A. B. . !.
orruption and $illing schemes Improper use of social media Illegal facilitating payments Economic e%tortion
Answer A
1;. According to the #;1# 0lo$al fraud /tudy of the AFE, the most common method of initial detection of occupational fraud is: A. B. . !.
Internal audit 2anagement re)iew E%ternal audit (ip
Answer ! 11. Internal control o)er financial reporting includes each of the following elements e%cept for: A. 2aintaining accurate financial records B. Pro)iding reasona$le assurance that receipts and e%penditures are recorded $ased on proper authori3ation $y management . E%ternal audit conducted in accordance with generally accepted auditing standards !. Adhering to company policies and procedures Answer 1#. Each of the following is a pillar of corporate go)ernance e%cept for: A. B. . !.
Answer ! 1'. (he corporate go)ernance system includes each of the following elements e%cept for: A. B. . !.
Board of directors Internal controls E%ecuti)e compensation policies 2onitoring $y top management
Answer ! 1. (he Agency (heory can $est $e descri$ed as: A. (he relationship $etween top management and the $oard of directors B. (he relationship $etween the $oard of directors and shareholders
. (he relationship $etween top management and the $oard of directors, and shareholders !. (he relationship $etween the e%ternal auditors and top management Answer 1. Agency costs refer to: A. (he costs incurred in monitoring managerial performance B. (he costs incurred $ecause there is information asymmetry $etween the corporation and outsiders . (he costs incurred $ecause insiders know more a$out a company than do outsiders !. All of the a$o)e Answer ! 1. Backdating of stock options is unethical $ecause: A. It fa)ors top e%ecuti)es o)er other company employees with respect to the num$er of options B. It purposefully manipulates the option criteria that determine their )alue . It changes the e%ercise price on options to $enefit top e%ecuti)es !. All of the a$o)e Answer B 16. (he term disgorgement means: A. B. . !.
(o gi)e up one=s meal after eating (o return profits earned illegally (o return ill-gotten gains (o gi)e up one=s $oard position after a fraud incident
Answer 19. (he stakeholder )iew emphasi3es the o$ligations of management to: A. B. . !.
(he shareholders (he shareholders and creditors All parties impacted $y corporate decisions in a significant way (he $oard of directors
Answer
1. (he fiduciary duty of the $oard of directors includes all of the following e%cept for: A. B. . !.
/afeguarding corporate assets Promoting shareholder interests E%ercising care in carrying out their responsi$ilities
Answer ! #;. (he le)el of care e%pected of a reasona$le person under similar circumstances in meeting one=s fiduciary duty is called: A. B. . !.
!uty of loyalty !uty of care (ransparency All of the a$o)e
Answer B #1. >nder the /ar$anes-+%ley Act, which of the following $odies must contain mem$ers that are 1;;? independent of management8 A. B. . !.
Board of directors Audit committee Internal auditors All of the a$o)e
Answer B ##. (o ensure audit committee independence, the committee should meet separately with each of the following groups e%cept for: A. B. . !.
/enior e%ecuti)es Internal auditors E%ternal auditors (he audit committee should meet separately with all of the a$o)e
Answer ! #'. +ne failure with respect to the internal controls at (yco and Adelphia was: A. Falsification of $ank statement $alances B. (op e%ecuti)es manipulated financial statement amounts . (op e%ecuti)es used hundreds of millions of dollars from interest-free loans for personal purposes !. (op management engaged in a Pon3i scheme
Answer #. An ethical corporate culture can $est $e esta$lished $y: A. B. . !.
/etting a proper tone at the top Esta$lishing strong internal controls &a)ing an effecti)e internal audit function All of the a$o)e
Answer ! #. /trong corporate go)ernance relies on a strong $oard of directors. *hich of the following would $e a strong candidate to $e a $oard director for @7, Inc.8 A. B. . !.
ommunity mem$er who has already ser)ed on the $oard 1 years. In)estor who has a multi-million dollar oint )enture with the E+ and F+.
Answer #. (he ethical dissonance model looks at the ethical fit of the organi3ational and indi)idual )alues. (he optimal fit for an indi)idual with high indi)idual ethics would $e: A. B. . !.
&igh- &igh &igh-5ow 5ow- &igh 5ow-5ow
Answer A #6. A strong and effecti)e internal control en)ironment can $e enhanced $y: A. B. . !.
Financial statements that present fairly financial position and results of operations 0i)ing the internal auditors direct and unrestricted access to the audit committee &a)ing the internal auditors report to the e%ternal auditors &a)ing the e%ternal auditors report to the audit committee
Answer B #9. (he Institute of Internal Auditors ode of Ethics includes each of the following principles e%cept for: A. Integrity
B. +$ecti)ity . Independence !. onfidentiality Answer #. /ection ';# of the /ar$anes-+%ley Act re4uires that management: A. B. . !.
Assess the company=s internal controls ertify the financial statements !isclose all e%ecuti)e compensation All of the a$o)e
Answer B
';. Each of the following is part of the Cew 7ork /tock E%change listing re4uirements e%cept for: A. All directors must $e independent of management B. Audit committees must consist of at least three mem$ers all of whom are independent of management and the entity . (he audit committee should report regularly to the $oard of directors !. Each listed company must ha)e an internal audit function Answer A '1. A trou$ling result of the #;11 Cational Business Ethics /ur)ey is: A. B. . !.
Increased witnessing of misconduct in the workplace. !ecline in pressure to compromise ethics. Increased rate of retaliation against whistle$lowers. !ecline in negati)e )iew of super)isors= ethics.
Answer '#. A seemingly positi)e result of the #;11 Cational Business Ethics /ur)ey is: A. B. . !.
(he percentage of employees who had reported misconduct at work is increasing Pressure to compromise ethical standards has $een decreasing (he rate of retaliation against whistle$lowers has $een decreasing (he percentage of employees who said they could 4uestion management without fear of retaliation is decreasing
Answer A
''. A uni4ue aspect of "ohnson D "ohnson=s redo is that it: A. It is an aspirational statement rather than the typical thou shalt not form of a code of ethics B. It encourages employees to internali3e the )alues of the company . It follows a stakeholder approach to decision making !. All of the a$o)e Answer ! '. (he #;11 Cational Business Ethics /ur)ey indicates each of the following with respect to how employees )iew the ethics and ethical practices of organi3ations they work for e%cept for: A. B. . !.
2isconduct at work has declined o)er the years *histle$lowing is up Ethical cultures are weaker Pressure to cut corners is lower
Answer '. *ith respect to whistle$lowing, the /ar$anes-+%ley Act: A. Protects employees of pu$licly traded companies who pro)ide e)idence in fraud cases B. onfers legal protection on managers who reported wrongdoing $y top e%ecuti)es . onfers legal protection on the $oard of directors for fraudulent actions $y management !. All of the a$o)e Answer A '. A reason that Bernie 2adoff was a$le to pull off the Pon3i scheme for so long was: A. B. . !.
&e was trusted $y those who in)ested with him (he /E failed to act on tips a$out 2adoff=s 4uestiona$le practices (he auditors either looked the other way or didn=t look too hard to find the fraud All of the a$o)e.
Answer !
'6. As a manager in her firm, 5ucy concerns herself with the effecti)eness of internal controls. &er main focus is how efficient and effecti)e the company=s internal controls are o)er time. *hich component of internal control is 5ucy engaging in8
A. B. . !.
Answer ! '9. (he +/+ report states that management should enact fi)e components related to internal control o$ecti)es including each of the following e%cept for:
A. B. . !.
ontrol en)ironment
Answer '. *hat are the fiduciary o$ligations of the $oard of directors8 A. 2a%imi3e profits for the company and its shareholders B. 0i)e e%cessi)e e%ecuti)e compensation . /afeguard the organi3ation=s resources and interests of the company=s stakeholders !. Allow high risk accounting practices Answer ;. *hich of the following is not an ethical issue in $usiness8 A. B. . !.
onflicts of interest 2a%imi3ation of profits !iscrimination Information technology
Answer B 1. Financial statement fraud includes all $ut A. B. . !.
+)erstating re)enues >nderstating e%penses +)erstating warranties on new product Improper asset )aluations
Answer
#. *hich is a 4uestiona$le ethical work $eha)ior of an employee8 A. B. . !.
&anding in all assignments on time. (aking time off without pay to attend to a family crisis. >sing social media during the work day to update your Face$ook page. 0i)ing your $est effort during work time.
Answer '. *hat are the four pillars of corporate go)ernance8 A. B. . !.
Answer . *hat is the agency pro$lem8 A. B. . !.
2anagers 2anagers 2anagers 2anagers
place corporate goals ahead of personal goals. place personal goals ahead of corporate goals. place social goals ahead of personal goals. place corporate goals ahead of social goals.
Answer B . *hat is a cause of agency pro$lems8 A. B. . !.
Information asymmetry Information symmetry Information technology Information pri)acy
Answer A . *hich of the following is not used to o)ercome the agency pro$lem8 A. B. . !.
E%ecuti)e compensation Audited financial statements
Answer
6. ompensation of e%ecuti)es has soared o)er the last forty plus years to more than ;; times the pay for a)erage workers. /uggested remedies to rein in e%ecuti)e compensation especially during time of corporate wrongdoing include each of the following e%cept for: A. B. . !.
/ay on Pay rules !isgorgement 5imits on e%ecuti)e compensation law$acks
Answer
9. (he #;1; !odd-Frank Act includes additional incenti)es for whistle$lowers. *hat is the act=s effect on whistle$lowing $y accountants8 A. Co accountant, internal or e%ternal, whether $y o$ title or certification may recei)e a reward. B. All accountants who whistle-$low are protected against retaliation. . Internal auditors who whistle-$low may recei)e a reward. !. A PA may report a )iolation of a pu$lic accounting firm=s performance in an audit. Answer !
. +ne of the duties of a $oard of directors is to protect the interests of stakeholders. *hich of the following is an e%ample of protecting such interests8 A. B. . !.
Back dating options for e%ecuti)es !ecepti)e $usiness practices +ff $alance sheet financing (ransparent financial reporting
Answer !
;. (he relationship $etween the shareholders, directors, and management of a company, as defined $y the corporate charter, $ylaws, formal policy and rule of law is known as A. B. . !.
ode of ethics orporate sustaina$ility orporate responsi$ility orporate go)ernance
Answer !
1. (he aim of e%ecuti)e compensations is to: A. B. . !.
Enrich the e%ecuti)e Align the goals of the e%ecuti)e with the workers Align the goals of the e%ecuti)e with the shareholders Enrich the company
Answer #. (he most important )alues included in corporate )alues statements include: A. B. . !.
Pursuit of self-interests ommitment to $eating the competition !i)ersity Integrity and ethical $eha)ior
Answer ! '. *hat is a uni)ersity=s e4ui)alent of a code of ethics8 A. B. . !.
&onor code /tudent &and$ook Faculty &and$ook /tatement of Galues
Answer A
. (o whom does the management owe its ultimate allegiance8 A. B. . !.
Employees reditors /hareholders 0o)ernment
Answer . A code of ethics for financial professionals is important under /ar$anes-+%ley $ecause: A. B. . !.
It strengthens the relationship $etween financial professionals and shareholders It supports the certification of financial statement re4uirement It decreases the likelihood of whistle$lowing It enhances the ethics of the audit committee
Answer B . A similarity $etween the Bernie 2adoff situation and that of <. Allen /tanford is they $oth were: A. (he head of a maor >./. stock e%change B. (he E+ of a company that went out of $usiness after a maor financial statement fraud . In)ol)ed in Pon3i schemes !. E%onerated in a trial $ecause of lack of e)idence of wrongdoing Answer 6. &enry is the chief accounting office of @7 o. &e $elie)es the financial statements are accurate $ut he has $een asked $y the F+ to accelerate the recording of re)enue at the end of the year to push a material amount that should $e reported ne%t year into the current year. If &enry is an ethical accountant he should react $y: A. B. . !.
0oing along with the re4uest as a one-time concession to the F+.
Answer 9. An ethical organi3ation incorporates what into their decision-making process: A. B. . !.
ore )alues /trategic policies
Answer ! . (he Act that ena$les a whistle$lower to recei)e compensation for $lowing the wh istle if the claims are deemed to $e )alid and the indi)idual is not precluded from recei)ing such an award is: A. B. . !.
(he /ar$anes-+%ley Act (he Foreign orrupt Practices Act (he Pri)ate /ecurities 5itigation
Answer !
;. (he primary ethical concern when contemplating whistle$lowing as an accountant is: A. B. . !.
It may )iolate my ethical o$ligations It may fail to correct the matter It may not $e considered ethical $y my employer All of the a$o)e
Answer A Multiple Choice – Case Questions
1. In the Para$le of /adhu case, Bowen (. 2oy=s friend /te)e summed up the dilemma $y saying: A. I feel that what happened with the sadhu is a good e%ample of the $reakdown $etween ethics in different cultures. B. I feel that what happened with the sadhu is a good e%ample of the $reakdown $etween the indi)idual and corporate ethics . People tend to ine)ita$ly act in their own $est interest !. All of the a$o)e Answer B #. In the Amgen case, former employees, /hawn +=Brien and Hassie *estmoreland, sued the company for: A. B. . !.
*rongful termination Fraudulent actions !iscrimination
Answer ! '. (he primary ethical issue in >nited (hermostatic ontrols is: A. B. . !.
2isappropriation of corporate assets Accelerating the recording of re)enue into an earlier period !elaying the recording of e%penses into a later period Failure to fully disclose all information
Answer B . An important issue in the &ewlett Packard prete%ting case was: A. >sing false pretenses to o$tain confidential information a$out mem$ers of the $oard of directors
B. !isclosing confidential client information without the appro)al of the client . Producing fraudulent financial statements !. (wittering a$out a competitor and dri)ing him out of $usiness Answer A . (he I whistle$lowing ase deals with A. B. . !.
Ethics of retaliation Professional whistle$lowing for gain
Answer B . (he Bennie and the "ets case deals with: A. B. . !.
Proper income classification of re$ates recei)ed from insurers Accelerating re)enues !elaying e%penses Failing to record re$ates from insurers
Answer B 6. A maor allegation in the @(+ Energy case was the: A. B. . !.
Insider trading Giolation of FPA Breach of fiduciary duties $y $oard of directors
Answer 9. In the Bhopal case, in e)aluating its e%posure to possi$le future lia$ility due to technology failures, >nion ar$ide used which of the following concepts: A. B. . !.
Professional skepticism Business risk ost-$enefit analysis
Answer B . (he case of /te)e "o$s=s &ealth deals with: A. !isclosure issues $eyond financial information
B. !isclosures re4uired of mem$ers of $oard of directors . Fiduciary o$ligations of a E+ !. Fiduciary o$ligations of a $oard of directors Answer A 6;.
An important issue in the &P case with e)ent hostess "odie Fisher is: A. B. . !.
onflict of interest of 2ark &urd Alleged se%ual harassment of "odi Fisher !isclosure of confidential client information $y &urd to Fisher All of the a$o)e
Answer !
Essay Questions
1. *hat is meant $y corporate go)ernance8 !escri$e the elements of a go)ernance system and how it can help to enhance financial reporting. Answers will )ary #. ompare and contrast the agency and stakeholder theories of corporate go)ernance from the perspecti)e of those in)ol)ed in and affected $y managerial decision making. Answers will )ary '. A strong and effecti)e system of internal controls can help to create an ethical corporate culture. E%plain how the internal control system can enhance ethical decision making. Answers will )ary . (ommy &u$$s is the controller of @7 orporation.
. *hat are the most important )alues to include in a corporate code of ethics or credo and why are these important )alues8 Answers will )ary 6. Analy3e the reaction of (oyota from an ethical perspecti)e to disclosures that occurred in late #;; and early #;1; that the accelerator in some $rands might get stuck and result in unintended acceleration of the car. &ow does (oyota=s reaction relate to that of Ford with the Pinto and "ohnson D "ohnson with the (ylenol poisoning8 Answers will )ary 9. *hat is whistle$lowing8 !istinguish $etween internal and e%ternal whistle$lowing including the parties that might $e contacted in each case. Is it ethical to pro)ide incenti)es or rewards for people to whistle-$low8 Answers will )ary . E%plain the ethical dissonance model and what a high ethics indi)idual should look for in finding an ethical employer. Answers will )ary 1;. An Internet ompany has a chance to e%pand its $usiness into a de)eloping country. (his chance would make money for its shareholders, as it would $e the first Internet ompany allowed in the country. &owe)er, the conditions demanded $y the country is that the Internet ompany must turn o)er to the go)ernment the history of Internet sites )isited $y its citi3ens. Additionally the Internet ompany must also censor Internet sites re4uested through the search engine. In the >nited /tates and other countries, the Internet ompany would not monitor, censor, or turn o)er a history of Internet sites to any go)ernment. *hat should the Internet ompany do8 >se ethical theories and ethical decision making model to $ack up your decision. Ans: Issues: (he ompany is faced with the decision of whether to treat citi3ens in one country differently than citi3ens in other countries. (his is a trou$ling issue since it applies to the right to pri)acy of the citi3ens. (he ompany is also faced with whether their primary o$ligation is to make profits for shareholders per 2ilton Friedman or per another ethical theory. In looking at the different ethical theories, rights approach would say if one country=s citi3ens are entitled to pri)acy, then another country=s would also. !eontology would also say that the imperati)e uni)ersal would re4uire citi3ens of all countries to $e treated the same. >tilitarianism would say that the end ustifies the mean so that the co mpany
would ha)e to decide if the end was profits or treating all citi3ens of the world the same. 11. A school district decided to add an ethics officer to its administration. (he district had watched how often the district was dealing with ethically sensiti)e situations. After doing research into how many organi3ations used an ethics officer and the desired education and $ackground for such an officer, the district ad)ertised for a person with the following 4ualifications: education in accounting, finance, or criminal usticeJ PA preferredJ and e%perience with compliance or audits. (he district hired a person with a PA license, degree in accounting and e%perience as an internal auditor doing compliance audits. At the press conference to introduce the new ethics officer, a local news reporter pointedly asked a$out the candidate=s $ackground. (he ethics officer stated as a PA he knew how to handle ethical issues and he had the highest integrity. (he reporter decided to a little more $ackground research $efore writing the article. (he state $oard of pu$lic accountancy of that state maintained an online data$ase for the pu$lic to )erify that a PA was currently licensed. *hen the reporter could not find the ethics officer as a currently licensed PA, he called the district and the ethics officer for a comment. *hat should the district and ethics officer do8 >se the ethical de cision making model to defend your answer. Ans: 2any articles in the news often deal with o$ candidates who lie on their resumes. Beyond the o$)ious lack of honesty in lying on the resume for an ethics officer position, the district has in)ested time and money to inter)iew and select a candidate. Any runner-up candidates may not want the o$ after negati)e pu $licity on the district and the candidate that was chosen. An additional 4uestion might $e to ask whether the district should now include an e%tensi)e $ackground check on any o$ candidates or not and what is the ethical reasoning $ehind such a policy. Actual case follow-up: (he ethics officer had passed the PA and was a licensed as a PA in the state until 1; years ago when his license was re)oked $y the state $oard of pu$lic accountancy due to failure to complete re4uired continuing professional education KPEL hours and to pay license fees. (he officer resigned $efore the district could fire him. &e claimed he did nothing wrong as he had passed the PA e%am and had $een licensed, so he felt he was still a PA. (he district was em$arrassed and )owed to do e%tensi)e $ackground checks on any new candidates. (he preferred PA was no longer part of the o$ position. 1#. As part of a re4uired ethics course, students were re4uired to take an online ; minute ethics final. Facing graduation and man y pressures with starting new o$s and mo)ing, the students worked together to complete the final. /ince the essays were all closely worded the same, the instructor could determine that some sort of cheating on the ethics e%am had taken place. >sing ethical decision making
model, what should the school, instructor and students do8 *ould the suggested solution $e different if the school had an honor code8 Ans: (he students used an egoism approach to rationali3e cheating on the final. (he school and the instructor ha)e the dilemma of what to do. Although many would agree with punishment for the cheating, the dilemma is what is the goalMrole of a school and course. As an educational institute, the goal is pro$a$ly to educate the students. Is the cheating incident a failure of the students or the program8 +ne solution that the students may not think of is that the cheating students would ha)e to use ethical reasoning and ethical decision making model to ustify the solution to the pro$lem they caused.