Ethical Obligations and Decision-Making in Accounting: Text and Cases 3rd Edition

Busyboto Scooter Sales, Inc. Busyboto Scooter Sales, Inc. is the largest manufacturer of scooter bikes in the world. In 2003, the company announced a revolutionary scooter, a 250cc bike with sporty styling and advanced electronic features, including the Busyboto B-Matic transmission and the Busyboto Smart Card Key System. In its first

Foreign Corrupt Practices Act Allison Yancy and Ginger Boggs just finished playing four hours of board games following a contentious meeting with top management over the responsibility of Monosystems International, a company each had worked for from 1999-2009, for instituting a program of due diligence to prevent any further violation of

Gelt and Moola Gelt Systems is a publicly-owned corporation based in Portland, Oregon. Gelt designs and develops networks communication hardware and software products and provides related support services. Gelt is audited by Ducks and Beavers LLP, a regional firm located in Portland. Daisy Love has worked for Ducks and Beavers for two

Hot & Cold Inc. Hot & Cold Inc., is a publicly-owned company headquartered in the Los Angeles area. It is a global company with thousands of employees around the world. The company manufactures an extensive variety of temperature measuring equipment and pressure gauges. The company has been a leader in its field for almost

Lupeville Senior Center Lupeville Senior Center serves adults over sixty years of age by providing in home nursing care and residential facilities. The center in Lupeville, Indiana can accommodate up to one hundred residents. The facility was recently investigated for failing to meet required standards. The investigators noted the following problems that needed to

Peachtree Enviro-Management Systems Peachtree Enviro-Management Systems is a large provider of trash hauling services primarily in the Atlanta area. The company grew in its early years from $1 million in assets, $700,000 in revenue, and $100,000 in net income in 2004 to $20 million in assets, $15 million in revenues, and

Second National Bank v. First National Bank1 This case involves three parties: 1. A customer, Paul Gerry, who went to a bank and established a relationship after which (about one year later), the customer was allowed to open a revolving credit line with the bank, 2. The bank, First National Bank,

The City of West Buckle Kile Jalop is the chief of police of the city of West Buckle. Jalop was the chief of a smaller town and decided to move up after three years. He accepted the offer from the mayor of West Buckle to be its Police Chief effective October

The Ethics of iPod-ing Your accounting professor just finished a lecture on why it is unethical to download music to an iPod. According to Professor Goody, it is wrong to download music from iTunes Music Store because the artists that originally recorded the music do not get a royalty each time

The Lecturer It was reported in the Los Angeles Times on March 25, 2006 (Page B7) that a business school lecturer at USC was arrested by FBI agents for allegedly bilking students out of more than $1.5 million and spending much of the money on show horses (apparently, that were not

The New Staff Member Pavzi Razzouk is working on his first audit after graduation. He came across an unusual transaction. The client had recorded $1million in operating revenue that represented a payment from a customer who had backed out of a contract to buy product from the client. Pavzi discovered that

The State of Nirvana The state of Nirvana was formed as the 51st state of the United States of America in 2010 after California decided to split in two. The northern part of the state became the State of Nirvana and it chose San Francisco as its Capitol city. In what

The CPA Review Course The CPA review course, Results and Performance, or RAP is coming to the campus of State University to talk to accounting and other interested students about their review program. Daniel Justin is the campus representative for RAP. In that role he is expected to post brochures about

Whistleblowing under Sarbanes-Oxley The case of George Hernondez is a unique one under the whistleblower protection provision of the Sarbanes-Oxley Act because it is the first documented case where someone who sued under Section 806 of the Act was given the right to return to his job after bringing a successful action.

Who is Responsible? On August 21, 2007, Comfi Beds and Furniture, Inc. planned to purchase Sleep Ezy Corporation, and hired the accounting firm of Loosy and Goosy LLP, to review the audit that had been prepared by Billy Bob and Brothers, CPAs, the accountant for Sleep Ezy, as of the fiscal

Wi-Fi Security: We Spy for U In 2006 the start-up company, We Spy for U, located in the Research Triangle Park in North Carolina, developed a Wi-Fi security system that prevents unauthorized users from hacking into a computer laptop as long as the system is activated. The system became an overnight

Case 1-1 Harvard Cheating Scandal Yes. Cheating occurs at the prestigious Harvard University. In 2012, Harvard forced dozens of students to leave in its largest cheating scandal in memory but the institution would not address assertions that the blame rested partly with a professor and his teaching assistants. The issue is whether

Case 1-10 Telecommunications, Inc. Telecommunications, Inc., is a U.S. company, a global leader in information technology, and it specializes in building data network systems. The company is a major player in the industry, although it is no match for companies like Cisco Systems. Recently, however, it has been more successful in securing contracts to build

Case 1-2 Giles and Regas Ed Giles and Susan Regas have never been happier than during the past four months since they have been seeing each other. Giles is a 35-year-old CPA and a partner in the medium-sized accounting firm of Saduga & Mihca. Regas is a 25-year-old senior accountant in the same firm.

Case 1-3 NYC Subway Death: Bystander Effect or Moral Blindness On December 3, 2012, a terrible incident occurred in the New York City subway when Ki-Suck Han was pushed off a subway platform by Naeem Davis. Han was hit and killed by the train, while observers did nothing other than snap photos

Case 1-4 Lone Star School District Jose and Emily work as auditors for the state of Texas. They have been assigned to the audit of the Lone Star School District. There have been some problems with audit documentation for the travel and entertainment reimbursement claims of the manager of the school district. The manager

Case 1-5 Reneging on a Promise Part A Billy Tushoes recently received an offer to join the accounting firm of Tick and Check LLP. Billy would prefer to work for Foot and Balance LLP but has not received an offer from the firm the day before he must decide whether to accept the position at

Case 1-6 Capitalization versus Expensing Gloria Hernandez is the controller of a public company. She just completed a meeting with her superior, John Harrison, who is the chief financial officer of the company. Harrison tried to convince Hernandez to go along with his proposal to combine twelve expenditures for repair and maintenance

Case 1-7 Eating Time Kevin Lowe is depressed. He has been with the CPA firm Stooges LLP for only three months. Yet the partners in charge of the firmBo Chambers and his brother Moe Chambershave asked for a sit-down. Heres how it goes: Kevin, we asked to see you because your time reports indicate

Case 1-8 A Faulty Budget Jackson Daniels graduated from Lynchberg State College two years ago. Since graduating from the college, he has worked in the accounting department of Lynchberg Manufacturing. Daniels was recently asked to prepare a sales budget for the year 2014. He conducted a thorough analysis and came out with projected sales of

Case 1-9 Cleveland Custom Cabinets Note: A correction was made to the case in the text. The cost of direct materials used should be $2,000,000. The cost of goods sold is both cost of goods manufactured and sold. Cleveland Custom Cabinets is a specialty cabinet manufacturer for high-end homes in the Cleveland Heights and Shaker Heights

Chapter 1 Discussion Questions 1. A common ethical dilemma used to distinguish between philosophical reasoning methods is the following. Imagine that you are standing on a footbridge spanning some trolley tracks. You see that a runaway trolley is threatening to kill five people. Standing next to you, in between the oncoming trolley and the

11. Is there a difference between cheating on a math test, lying about your age to purchase a cheaper ticket at a movie theatre, and using someone elses ID to get a drink at a bar? All are examples of lying and affect ones character through honesty and integrity. Many will use

Case 2-1 WorldCom The WorldCom fraud was the largest in U.S. history, surpassing even that of Enron. Beginning modestly during mid-year1999 and continuing at an accelerated pace through May 2002, the company, under the direction of Bernie Ebbers, the CEO, Scott Sullivan, the CFO, David Myers, the controller, and Buford Yates, the director of

Case 2-10 Gateway Hospital Troy just returned from a business trip for health care administrators in Orlando. Kristen, a relatively new employee who reports to him, also attended the conference. Troy works for Gateway Hospital, a for-profit hospital in the St. Louis area. The Orlando conference included training in the newest

Case 2-2 Better Boston Beans Better Boston Beans is a coffee shop located in the Faneuil Hall Marketplace near the waterfront and Government Center in Boston. It specializes in exotic blends of coffee, including Sumatra Dark Roast Black, India Mysore Gold Nuggets, and Guatemala Antigua. It also serves a number of blended

Case 2-3 The Tax Return Brenda Sells sent the tax return she prepared for the president of Purple Industries, Inc., Harry Kohn, to Vincent Dim, the manager of the tax department at her accounting firm. Dim asked Sells to come to his office at 9:00 a.m. on Friday, April 12, 2013. Sells had no

Case 2-4 Shifty Industries Shifty Industries is a small business that sells home beauty products in the San Luis Obispo, California area. The company has experienced a cash crunch and is unable to pay its bills on a timely basis. A great deal of pressure exists to minimize cash outflows

Case 2-5 Blues Brothers Assume it is December 31, the last day of the fiscal year, and you are an internal accountant for Saturday Night Accessories, a privately-owned company run by the Blues Brothers, that provides personal services to consumers. On that date a $1.2 million major contract for one year of services

Case 2-6 Supreme Designs, Inc. Supreme Designs, Inc., is a small manufacturing company located in Detroit, Michigan. There are three stockholders of the companyGary Hoffman, Ed Webber, and John Sullivan. Hoffman manages the business including the responsibility for the financial statements. Webber and Sullivan do most of the sales work, and they cultivate potential customers

Case 2-7 Milton Manufacturing Company Milton Manufacturing Company produces a variety of textiles for distribution to wholesale manufacturers of clothing products. The companys primary operations are located in Long Island City, New York, with branch factories and warehouses in several surrounding cities. Milton Manufacturing is a closely held company. Irv Milton is the president of

Case 2-8 Juggyfroot Im sorry, Lucy. Thats the way it is, Ricardo Rikey said. I just dont know if I can go along with it, Rikey, Lucy replied. We have no choice. Juggyfroot is our biggest client, Lucy. Theyve warned us that they will put the engagement up for bid if we refuse to go

Case 2-9 Phar-Mor The Dilemma The story of Phar-Mor shows how quickly a company that built its earnings on fraudulent transactions can dissolve like an Alka-Seltzer. One day Stan Cherelstein, the controller of Phar-Mor, discovered cabinets stuffed with held checks totaling $10 million. Phar-Mor couldnt release the checks to vendors because it did not have enough

Chapter 2 Discussion Questions 1. Identify the stakeholders and how they were affected by Heenes actions? The stakeholders in the Balloon Ball Hoax are the boy, Falcon Heene; the parents, Richard and Mayumi Heene; brothers, Bradford and Ryo Heene; Larimer County sheriff, Jim Alderman; Denver International Airport travelers and employees; National Guard unit; local

10. Arthur Andersen LLP was the auditor for Enron, WorldCom, Waste Management and other companies that committed fraud. Andersen was forced to shut its doors forever after a U.S. Department of Justice lawsuit against the firm that it had obstructed justice and lied to the government in the Enron case.

Case 3-2 Amgen Whistleblowing Case Amgen, a Thousand Oaks, Californiabased company, has been dealing with lawsuits and whistle-blower claims for years over its marketing tactics. The following describes the lawsuits, language from the legal filings against Amgen, and a statement made by the company on October 24, 2012, about its settlements in its earnings announcement

Case 3-6 Bennie and the Jets Bennie Gordon is a CPA and a member of the AICPA. Gordon works as an accounting manager at the division level at Jet Energy Company, a publicly-owned company headquartered in South Carolina. Jet Energy is a regulated utility company by the state and provides electricity to

Case 3-9 Bhopal, India: A Tragedy of Massive Proportions We are citizens of the world. The tragedy of our times is that we do not know this. Woodrow T. Wilson (18561924), 28th president of the United States At five past midnight on December 3, 1984, 40 tons of the chemical methyl isocynate (MIC), a

Indias Position The Indian government has itself acknowledged that 521,262 persons, well over half the population of Bhopal at the time of the toxic leak, were exposed to the lethal gas. 1 In the immediate aftermath of the accident, most attention was devoted to medical recovery. The victims of the MIC leak suffered

Case 3-7 Exxon XTO Merger ExxonMobil Corporation (Exxon) is the worlds largest corporation in terms of revenue and one of the largest in market capitalization. It had sales of $486 billion in 2011giving it the #1 position on Fortune 500 in that category. In recent years Exxon has expanded its operations

Case 3-4 Hewlett-Packard1 Legal Settlement On December 8, 2006, Californias attorney general announced a settlement with Hewlett-Packard (HP) over its corporate spying scandal. The civil settlement involved a lawsuit the state filed against the computer giant in Santa Clara County Superior Court. Under the agreement, HP will pay $13.5 million to create a

Case 3-10 Accountability of Ex-HP CEO in Conflict of Interest Charges How could a CEO and chairperson of the board of directors of a major company resign in disgrace over a personal relationship with a contractor that led to a sexual harassment charge and involved a conflict of interests, a violation of

Case 3-5 IRS Whistleblower and Informing on Tax Cheats On October 4, 2012, the Internal Revenue Service paid a $2 million reward to a whistleblower that exposed an alleged tax avoidance scheme by Illinois Tool Works Inc. (ITW) that cost the U.S. Treasury hundreds of millions of dollars. The scheme involved ITW enlisting

Case 3-1 The Parable of the Sadhu Bowen H. McCoy (Reproduced with the permission of the Harvard Business Review) Last year, as the first participant in the new six-month sabbatical program that Morgan Stanley has adopted, I enjoyed a rare opportunity to collect my thoughts as well as do some traveling. I spent the

Questions 1. According to the Ethical Dissonance Model, the ethical person-organization fit helps to define the ethical culture of an organization and ones role in it. The ethics of an individual influences the values one brings to the workplace and decision-making, while the ethics (through culture) of the organization influences that

Case 3-8 Disclosure of Steve Jobs Health as Apple CEO: A Public or Private Matter? An important issue within the scope of corporate governance is whether a company should disclose the health problems of its CEO and how much information should be disclosed. The sensitivity of this issue is exemplified at Apple

Case 3-3 United Thermostatic Controls United Thermostatic Controls is a publicly owned company that engages in the manufacturing and marketing of residential and commercial thermostats. The thermostats are used to regulate temperature in furnaces and refrigerators. United sells its product primarily to retailers in the domestic market, with the company headquartered in San Jose, California.

Chapter 3 Discussion Questions 1. In her book 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 want and need at almost any cost." Discuss what

8. According to the IIA Code of Ethics, internal auditors should make a balanced assessment of all the relevant circumstances and should not be unduly influenced by their own interests or by others in forming judgments. Which interests are being referred to in that statement and how might they influence the ethical decisions of

16. In October 2010 it was reported that Cheryl Eckard, a quality-assurance manager at the pharmaceutical company Glaxo-SmithKline who had blown the whistle on the safety of products made in its Puerto Rico plant, had been fired as a result of what the company called a redundancy related to the

Case 4-1 America Online (AOL) Background In May 2000, America Online Inc. (AOL), the worlds biggest Internet services provider at the time, settled charges that it improperly accounted for certain advertising costs. This was the first time the SEC had brought such an enforcement case against a public company for improper capitalization of advertising related to

Case 4-2 Beauda Medical Center 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 accounting firm of Hodgins and

Case 4-3 Family Games, Inc. Yeah, I know all of the details werent completed until January 2, 2014, but we agreed on the transaction on December 30, 2013. By my way of reasoning its a continuation transaction and the $12 million revenue belongs in the results for 2013. This comment was made by Carl

Case 4-7 Family Outreach Yimei was a senior state auditor in Michigan and licensed CPA. She has been assigned the audit of Family Outreach (FO), a non-profit social services organization that helps about 32,000 families a year with child- raising and child-development issues, especially those considered at-risk families. The organization holds workshops and programs

Case 4-4 First Community Church First Community Church is the largest church in the city of Perpetual Happiness. Yes, its in California! A meeting was held on Friday, November 16, to address the fact that money had been stolen from the weekly collection box during the course of the year and church leaders

Case 4-6 Gee Wiz Wanda David, a licensed CPA, works for Gee LLC, a professional accountancy corporation with offices in Wisconsin and Illinois, in the audit department and she also has some small business clients she services in her spare time generally on weekends. Her employer does not know that she does

Case 4-8 HealthSouth Corporation The HealthSouth case is unique because the CEO, Richard Scrushy, was initially acquitted on all accounts while five former HealthSouth employees were sentenced by a federal judge for their admitted roles in a scheme to inflate revenues and reported earnings of the company from 1999 through mid-2002. These amounts are presented

Case 4-10 Independence Violations at PricewaterhouseCoopers PricewaterhouseCoopers (PwC) was involved in a series of independence violations in the late 1990s and early 2000s that resulted in strengthening the independence rules for auditors We discuss these situations in two parts. Part I On January 6, 2000, the SEC made public the report by independent consultant Jess Fardella,

Case 4-5 Lee & Han, LLC Joe Kang is an audit partner for Lee & Han, LLC. Joe is a CPA in the state of Florida and a member of the AICPA. He recently met with Kate Boller, the CFO of Frost Systems, an audit client of the firm, about the market value

Chapter 4 Discussion Questions 1. It has been said that independence is the cornerstone of the accounting profession. Explain what this means. How do auditors protect against impairments of independence? Independence is considered the cornerstone of the accounting profession as without independence the other skills, competencies and values of an accountant are a distant

14. What is the danger from an ethical perspective of having a CPA firm that conducts the audit of a public company also engaged in consulting with the company on the installation of a new financial information system? What about giving tax advice to an audit client? What are the possible ethical dangers

Test Bank Chapter 4 Multiple Choice Questions 1. The International Federation of Accountants (IFAC) research report, Rebuilding Public Confidence in Financial Reporting: An International Perspective, has as its goal which of the following: A. Creating an international CPA certificate B. Examine ways of restoring the credibility of financial reporting and corporate disclosure from an

44. To whom do the accounting codes of professional conduct (either the state board of public accountancy or AICPA) apply? A. Those CPAs in public accounting only. B. Those CPAs in industry, government, and education. C. Those CPAs in public accounting, industry, government, and education.D. Those CPAs in public accounting, doing auditing and

Case 5-4 Audit Client Considerations and Risk Assessment Lanny Beaudean joined the CPA firm of Cardinal & Coyote LLP in 200 11after working for two years for the IRS in Phoenix, Arizona. Cardinal & Coyote is a second-tier CPA firm just below the Big Four in size. Beaudean had passed all four parts of

Case 5-1 Computer Associates Computer Associates (CA) is a business consulting and software development company that designs, markets, and licenses computer software products that allow businesses to efficiently run and manage critical aspects of their information technology. CAs stock trades on the New York Stock Exchange and is registered pursuant to

Case 5-6 Dunco Industries The following two cases deal with accounting issues at Dunco Industries. Part 1 Marcus Yamabuto Marcus Yamabuto graduated from Washington State University in June 2013. He began his career working for Dunco Industries, a public company that manufactures plasma television monitors. Frank Johnson is the chief executive officer of Dunco and Karen

Case 5- 8 Fannie Mae: The Governments Enron Background The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored entities (GSEs) that operate under congressional charters to help lower- and middle-income Americans buy homes. Both entities receive special treatment aimed at increasing home ownership by decreasing the cost

Case 5-7 First Community Bank This case involves the valuation of loan loss estimates of First Community Bank (FCB) and the examination of relevant accounts by the CPA firm of Howard & Stacey LLP. FCB provided mostly residential loans to customers in Las Vegas, Florida, and Arizona. Beginning in about 2004, FCB expanded

Case 5-10 Groupon Introduction 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 2008, Groupon a fusion of "group" and "coupon" combines social media

Case 5-5 Krispy Kreme Doughnuts, Inc. 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 FY 2003, and each quarter of FY 2004. By

Case 5- 9 Royal Ahold N.V. (Ahold) Summary of the Charges against Ahold On October 13, 2004, the SEC charged Royal Ahold N.V. (Ahold) with multiple violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. Charges were also filed against three former top executives: Cees

Case 5-2 ZZZZ Best 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. Minkow had high hopes to make it bigto be a millionaire very early

Chapter 5 Discussion Questions 1. What is the purpose of audit risk assessment? What are its objectives, and why is it important in assessing the likelihood that fraud may occur? Risk assessment is the process of estimating the likelihood of adverse conditions occurring. It is a what is the worst that can happen

13. In 2005, the IMA reported the results of a survey of business, academic, and regulatory leaders conducted by the Center for Corporate Change that found the corporations culture to be the most important factor influencing the attitudes and behavior of executives. The results indicate that 88 percent of the representatives who took

Case 6-2 Con-way Inc. Summary of Findings 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 was named CNF, Inc.; it changed its name

Case 6-1 SEC v. Halliburton Company and KBR, Inc. On February 11, 2009, the SEC announced settlements with KBR, Inc., and Halliburton Company to resolve SEC charges that KBR subsidiary Kellogg Brown & Root LLC bribed Nigerian government officials over a 10-year period, in violation of the Foreign Corrupt Practices Act, in order to

Case 6- 8 Kay & Lee LLP Kay and Lee LLP has just been retained as the auditor for Holligan Industries to audit the financial statements required by a bank, Second National Bank & Trust, as a prerequisite to extending a loan to the client. The auditor knows the bank is the clients principal

Case 6-7 Livingston & Haynes, P. C. This case concerns alleged violations of Section 10A of the Securities Exchange Act by Livingston & Haynes, P. C. (L&H), Howley and Wood in connection with L&Hs 2005 and 2006 year-end audits and quarterly interim reviews of the financial statements of LocatePlus Holdings Corporation (LocatePlus).

Failure to Competently Evaluate Evidence Obtained by the Confirmation Process In general, it is presumed that audit evidence is more reliable when it is obtained from knowledgeable independent sources outside the entity. During the 2005 year-end audit, L&H failed to competently evaluate the reliability of the audit evidence obtained by the

Case 6-6 SEC v DHB Industries, Inc., n/k/a Point Blank Solutions, Inc Background In the past few years, the U.S. Securities and Exchange Commission has stepped up its enforcement actions against independent directors of publicly traded companies. While the commission historically has not pursued public company directors, it does so when it

Case 6-9 Reznor v. J. Artist Management (JAM), Inc. Michael Trent Reznor met John Malm Jr., a part-time promoter of local rock bands who also is a licensed CPA, in Cleveland, Ohio, in 1985. Malm became Reznors manager and formed J. Artist Management (JAM), Inc. Reznor became the lead singer in the band Nine

Case 6-5 Vertical Pharmaceuticals Inc. et al v. Deloitte & Touche LLP 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 plans to acquire

Case 6-10 SEC v. Zurich Financial Services Background On December 11, 2008, the SEC reached agreement with Zurich Financial Services (Zurich) to settle the commissions charges against Zurich Financial Services Group for aiding and abetting a fraud by Converium Holding AG involving the use of finite reinsurance transactions to inflate improperly Converiums financial performance. The commissions

Chapter 6 Discussion Questions 1. Distinguish between common-law liability and statutory liability for auditors. What is the basis for the difference in liability? Common law liability arises from legal opinions issued by judges in deciding cases. These opinions become legal precedent and guide other judges in deciding on similar cases in the future. Common

14. Some auditors claim that increased exposure under Section 404 of the SOX creates a litigation environment that is unfairly risky for auditors. Do you think that the inability of auditors to detect a financial statement misstatement due to internal control fraud in a timely manner should expose auditors to litigation? Why

Case 7-3 Cubbies Cable Ernie Binks is a big baseball fan, so it is quite natural for him, at a time like this, to recall a phrase attributed to Yogi Berra: It was dj vu all over again. Binks is the partner in charge of the Cubbies Cable audit for the accounting firm of

Case 7-5 Dell Computer 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. On July 22,

Case 7-8 Diamond Foods On November 14, 2012, Diamond Foods Inc. disclosed restated financial statements tied to an accounting scandal that reduced its earnings during the first three quarters of 2012 as it took significant charges related to improper accounting for payments to walnut growers. The restatements cut Diamonds earnings by

Case 7-1 Nortel Networks 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 financial reporting investigations by U.S. and Canadian securities agencies in 2004. The

Case 7-9 The North Face, Inc. 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 towards wilderness chic, climbers, mountaineers, skiers, snowboarders, hikers, and endurance athletes. The company

Case 7-2 Solutions Network, Inc. We cant recognize revenue immediately, Paul, since we agreed to buy similar software from Data Systems Solutions (DSS), Sarah Young stated. Thats ridiculous, Paul Henley replied. Get your head out of the sand, Sarah, before its too late. Sarah Young is the controller for Solutions Network, Inc., a publicly-owned

Case 7-4 Solway, Inc. Ben Davis is an internal accountant at Solway Inc.., a publicly-owned company headquartered in Austin, California. Ben reports to Chris Hodgins, the controller of the company. Hodgins reports to the CFO, Harry Benson. Benson reports to George Lee, the CEO. Solway has a three-person independent audit committee

Case 7-7 Sunbeam Corporation 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 Sunbeams operating results in connection with a purported turnaround of the company. When Sunbeams turnaround was exposed as

Case 7-6 Sweat Construction Company During the past few years due to increasing competition, Sweat Construction Company has been more aggressive in seeking out new business opportunities. One such opportunity is the Computer Assistance Vocational Training School. It has contracted for a new 1-million-square-foot facility in San Marcos, Texas. Computer Assistance trains computer programmers for

Case 7-10 Vivendi Universal Some of my management decisions turned wrong, but fraud? Never, never, never. This statement was made by the former CEO of Vivendi Universal, Jean-Marie Messier, as he took the stand in November 20, 2009, for a civil class action lawsuit brought against him, Vivendi Universal, and the former CFO, Guillaume Hannezo,

Chapter 7 Discussion Questions 1. In Arthur Levitts 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; Integrity may be losing out

11. Safety-Kleen is a North American company that offers environmental products and services. The company issued a major financial restatement in 2001. In 2000, the companys board of directors initiated an investigation of possible accounting fraud within the company. The next year, Safety-Kleen restated (reduced) previously reported net income by

Case 8-5 Autonomy Background On November 20, 2012, Hewlett-Packard (HP) disclosed that it had discovered an accounting fraud and has written down $8.8 billion of the value of Autonomy, the British software company it bought in 2011 for $11.1 billion, after discovering that Autonomy misrepresented its finances. In May 2102, HP

Case 8-6 Olympus Summary of the Case On September 25, 2012, Japanese camera and medical equipment maker Olympus Corporation and three of its former executives pleaded guilty to charges related to a $1.7 billion accounting cover-up in one of Japans biggest corporate scandals. Olympus admitted it tried to conceal investment losses by

Case 8-2 Parmalat: Europes Enron After the news broke about the frauds at Enron and WorldCom in the U.S., there were those in Europe who used the occasion to beat the drum: Our Principles-based approach to accounting standard-setting is better than your rules-based approach. Many in the U.S. started to take a

Failure of the Board The statutory board is intended to act as a fundamental monitor within the company and check that the board of directors is complying with laws in their actions and decisions. The Parmalat board of statutory auditors was composed of three members; the number is significant as had there

Case 8-4 Royal Dutch Shell plc From 1907 until 2005, Royal Dutch Petroleum Company, a Netherlands-based company, and the Shell Transport and Trading Company, plc, a UK-based company, were the two public parent companies of a group of companies known collectively as the Royal Dutch/Shell Group (Group). Operating activities were conducted through the

Specific SEC Charges The SEC Complaint alleged the following: 1. As a result of Shells knowing or reckless overstatement of their oil and gas reserves in their financial statements, the groups commission filings, specified previously, as well as other public statements, contained materially false and misleading statements and disclosures. These filings contained

Case 8-3 Satyam: Indias Enron 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 exporter in India until January 2009, when the CEO and co-founder, Ramalinga Raju confessed to inflating

Class Action Lawsuits in the U.S. On January 11, 2010, India asked the authorities in the U.S. to not take any action against Satyam, as it would amount to punishing shareholders twice. Satyam can face punitive action in the U.S. because the companys shares are listed and traded on U.S. exchanges.

Chapter 8 Discussion Questions 1. In this chapter we discuss problems encountered by the PCAOB in gaining access to inspect work papers of audits by U.S. international accounting firms of Chinese companies. Explain why these problems exist including cultural, legal, and ethical considerations. Gray uses Hofstedes values to identify accounting values

9. What is the difference between legal and ethical compliance with corporate governance provisions? Discuss what might be the ethical compliance mechanisms from a virtue ethics perspective. Legal compliance with corporate governance creates a minimum set of standards and is contingent on the country and legal systems, business practices, and cultural

Notes on Major Case 1 Adelphia Communications Corp This case discusses a complex and high risk audit engagement. The auditors had to consider related party transactions and their effect on the application of GAAP and footnote disclosures. The case deals with the ethical obligations of management of Adelphia and the auditors. Ethical Issues

Notes on Major Case 4 Cendant Corporation Ethical Issues: This case centers on a variety of accounting issues that illustrate the lengths to which a company can go to manipulate earnings. Cendant manipulated membership revenue; improperly recorded merger and purchase reserves; improperly accounted for restructuring reserves and used it to smooth net income;

Notes on Major Case 3 MicroStrategy Ethical Issues: This case centers revenue recognition at MicroStrategy in 1997 to 1999. It provides an opportunity to discuss revenue recognition in the high tech industry and how to recognize revenue when the sales contract covers many products, prized as one, and when the products are very

Notes on Major Case 5 Navistar International This case discusses a complex and high risk audit engagement. The case looks at the consulting and auditing of complex audit issues. Ethical Issues: Deloitte had a duty and obligation of independence and due care in conducting the audit. Deloitte had consulted on the accounting treatments

Royal Ahold (Ahold) Ethical Issues Ahold had a very corrupt tone at the top which was evidenced by the actions of their former top executives who committed multiple acts of fraud within the company. With an unsuitable tone at the top came pressures, incentives, and opportunities to deceive the public which was

Notes on Major Case 6 Waste Management Ethical Issues: The Principle of Due Care in the AICPA Code of Professional Conduct obligates a CPA to perform services with competence and diligence and with concern for the best interest of investors and creditors who provide the capital needed for operations. Due Care also

An important issue in the HP case with "event hostess" Jodie Fisher is: A. Conflict of interest of Mark Hurd B. Alleged sexual harassment of Jodi Fisher C. Disclosure of confidential client information by Hurd to Fisher D. All of these Answer: D. D. D. James Doty, the chairman of the PCAOB, in his testimony before Congress

Which of the following is not true of "reasonable assurance"? A. The auditors have exercised due care B. The audit opinion is a guarantee that material misstatements have been identified C. The audit has been properly planned and supervised D. The auditors have followed GAAS Answer: B. B. B. Each of the following elements make up an

A client asks his accountant to ignore a mistake which overstated the accounts receivable account. The accountant decides that the accounts receivable account has to be corrected to state the correct amount. The accountant makes his decision based on his duty to society, respect for authority, and maintaining the social

Thorne's "Integrated Model of Ethical Decision Making" can best be described as: A. A depiction of a model of moral development B. A depiction of how the Principles in the AICPA Code of Professional Conduct influences decision making C. A model of the role of virtue in decision making D. A model of

The philosophical belief that you should judge the result, not the action (end justifies the means) is? A. Utilitarianism B. Deontology C. Justice D. Virtue ethics Answer: A. A. A. Kohlberg's model can best be described as: A. The various phases in one's moral development and related levels of moral reasoning B. A model of ethical action that

CPAs can advertise and solicit clients as long as such practices are: A. Conducted in a professional manner B. Informative about the CPA's services C. Not conducted in a misleading or deceptive manner D. Paid for by outside parties Answer: C. C. C. In performing risk assessment the auditor should identify the following types of misstatements: A.

The Private Securities Litigation Reform Act of 1995 applies the practice of ______ to auditor liability determinations. A. Risk assessment B. Fraud triangle C. Lowballing D. Proportionate liability Answer: D. D. D. Responsibility goes hand in hand with: A. Respect B. Loyalty C. Courage D. Accountability Answer: D. D. D. Why don't auditors prepare financial statements, as well as audit them? A. It would

Each of the following is a pillar of corporate governance except for: A. Responsibility B. Accountability C. Fairness D. Independence Answer: D. D. D. What ethical rules are violated when a CPA auditing a client provides inside information about the client to a friend? A. Independence and objectivity B. Objectivity and due care C. Due care and confidentiality D. Confidentiality

The duty of loyalty requires directors to A. Act in the best interests of the corporation B. Act in the best interests of the shareholder C. Act in the best interests of management D. All of these Answer: A. A. A. Each of the following is an example of the difference between application of full-IFRS and IFRS

The Olympus case deals with which of the following accounting issues: A. Booking impairment losses B. Selling bad assets to make investment losses smaller C. Concealing investment losses D. All of these Answer: D. D. D. Some critics claim the usefulness of the audit report is limited because: A. Auditors do not examine all of the transactions B.

The biggest problem in applying virtue theory to decision making is: A. It can be difficult to evaluate the effect of virtues on others in decision making B. It relies on moral absolutes in decision making C. It can be difficult to determine virtues to distinguish equals from unequal claims in decision

Sally is the only student from a foreign country in an Auditing class. On the day of the midterm exam, Sally asks the teacher whether she could use a dictionary to translate English words to her native tongue so she can better understand the questions. What do you think the

In the Bhopal case, in evaluating its exposure to possible future liability due to technology failures, Union Carbide used which of the following concepts: A. Professional skepticism B. Business risk C. Cost-benefit analysis D. Rights Theory Answer: B. B. B. Respect is an important character of behavior because: A. It entails a loyalty obligation to one's superior B.

Each of the following is a safeguard that helps to mitigate threats to independence except for: A. Safeguards created by the profession, legislation, or regulation B. Safeguards implemented by the attest client, such as a tone at the top C. Safeguards developed to ensure independence when performing nonattest services D. Safeguards implemented by

A unique aspect of occupational fraud is: A. The misuse of company assets B. The falsification of financial statements C. The failure to disclose full and complete information D. All of these Answer: A. A. A. A similarity between the Bernie Madoff situation and that of R. Allen Stanford is they both were: A. The head of

The COSO report states that management should enact five components related to internal control objectives including each of the following except for: A. Control environment B. Risk assessment C. Risk activities D. Monitoring Answer: C. C. C. What is the difference on contingent fees under the PCAOB rules versus the AICPA rules? A. Both rules allow contingent