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Chapter 13
Governance, Accountability, and Compliance
CHAPTER SUMMARY
The modern corporation is a remarkable form of economic organization that enables
everyone in society to interact for mutual gain. Ideally, everyone should benefit from the
wealth-creating power of business corporations. For corporations to function and
provide
their benefits, several problems must be solved. First, corporations must be
controlled
so that investors, employees, customers, suppliers, and other groups that
participate in
13.1: Identify the moral arguments and legal rules for shareholders’ control of publicly
held corporations, and the additional considerations for protecting the interests of
other stakeholders
13.2: Critique how financial reporting, corporate management roles, and the law function
to prevent fraud and other kinds of corporate misconduct, and the flaws in the
system that have allowed major scandals
13.3: Evaluate the components of corporate ethics programs, the federal guidelines
designed to punish and prevent misconduct, and how adopting a code of ethics
benefits companies
SUGGESTED DISCUSSION PROMPTS
2.
Do corporations exist merely to facilitate transactions, or is there some other reason
3.
What advantages does the stakeholder theory of corporate control have over the
ASSESSMENT FOR IN-CLASS USE
Multiple Choice Questions
Choose the BEST possible answer for each of the following.
1.
Shareholders have governance over a company in return for .
A.
influence
B.
capital
C.
prestige
D.
advertising
13.1: Identify the moral arguments and legal rules for shareholders’ control of publicly
held corporations, and the additional considerations for protecting the interests of other
stakeholders
Difficulty Level: Easy
Skill Level: Understanding
2.
The property rights theory of corporations has it that incorporation .
A.
is a general aspect of ownership
B.
is a matter of owning enough capital
C.
should be accompanied by rules
D.
is anyone’s right
Difficulty Level: Easy
Skill Level: Understanding
3.
Although Electronics, Inc. has a code of ethics for its subcontractors, it has
experienced issues with its government contracts. Several subcontractors have been
embroiled in scandals involving unethical conduct. Most recently, a subcontractor
falsified thousands of dollars in work orders. If Electronics, Inc. wants to show the
government that it is serious about preventing unethical conduct, it should
________.
A.
educate subcontractors about its expectations and monitor them for compliance
B.
emphasize that it bears little responsibility for the subcontractor’s behavior
because the subcontractor is not an employee by law
C.
warn subcontractors about the perils of getting caught
D.
provide proof of its code of ethics which prohibits unethical conduct
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Difficulty Level: Moderate
Skill Level: Evaluate
4.
Accountants, Inc. wishes to expand its accounting practice to include both
consulting and auditing services. Which aspect of its strategy should be examined
more closely?
A.
The accounting firm has failed to take into account that auditing is more
lucrative than consulting.
B.
Hiring an accounting firm for consultation can be problematic because it is not a
widely accepted business practice.
C.
CPAs are not qualified to give advice beyond accounting and financial matters.
D.
Conflicts of interest are likely to arise from offering both services to one client.
Difficulty Level: Moderate
Skill Level: Analyze
5.
Adolf Berle argued against public responsibility of a corporation on the basis of
.
A.
the rights of stakeholders
B.
limiting the power of shareholders
C.
excessive managerial power
D.
corporations’ impact on society
Difficulty Level: Easy
Skill Level: Understanding
6.
Although ABC Corporation has a comprehensive ethics program, several of its
employees have been charged with financial fraud. If ABC is subsequently
convicted of the crime and sentenced under the Federal Sentencing Guidelines, it
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can expect ________.
A.
strict sanctions without the possibility of leniency
B.
lenient sanctions because it has a comprehensive ethics program
C.
standard sanctions regardless of its comprehensive ethics program
D.
reassurance of no sanctions because it has a comprehensive ethics program
Difficulty Level: Moderate
Skill Level: Evaluate
7.
The central argument for shareholder control of a company states that .
A.
companies without shareholders are not likely to be profitable
B.
shareholders have the most to lose in their company involvement
C.
shareholders are more likely than management to operate a company
profitably
D.
management can only control a company insofar as they are paid by it
Difficulty Level: Easy
Skill Level: Understanding
8.
According to stakeholder theory, ___ .
A.
stakeholders invest the most capital in a corporation
B.
a company ought to be run to the benefit of everyone involved in it
C.
everyone involved in a company should be treated as shareholders
D.
ownership of a company should be divided among all stakeholders
Difficulty Level: Easy
Skill Level: Understanding
9.
Unethical business conduct usually arises from .
A.
ignorance of the law
B.
unscrupulous individuals acting alone
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C.
attempts to cheat shareholders of their dividends
D.
the way that an organization as a whole operates
Difficulty Level: Moderate
Skill Level: Analyze
10.
An effective corporate ethics program should include .
A.
standards that have been communicated to all levels
B.
oversight given to a few individuals
C.
training in all of the relevant laws
D.
reporting of all procedures to the public
Difficulty Level: Moderate
Skill Level: Analyze
Essay Questions
1.
Evaluate some key components of corporate ethics programs and how they
promote ethical conduct.
13.3: Evaluate the components of corporate ethics programs, the federal guidelines
designed to punish and prevent misconduct, and how adopting a code of ethics benefits
companies
Difficulty Level: Moderate
Skill Level: Evaluate
2.
Examine the reasoning behind the Sarbanes-Oxley Act and the ways in which it
prevents accounting fraud.
13.2: Critique how financial reporting, corporate management roles, and the law
function to prevent fraud and other kinds of corporate misconduct, and the flaws in the
system that have allowed major scandals
Topic/Concept: Corporate Accountability
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Difficulty Level: Moderate
Skill Level: Analyze
3.
Explain the reasons why shareholder theory of control better accounts for interest