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 consideration of that country. Legal compliance
requires a regulatory oversight mechanism (i.e., the U.S. SEC and PCAOB) to oversee compliance. In
many European countries the compliance is done through a “comply or explain” approach that puts the
pressure on the company to support noncompliance. Ethical corporate governance mechanisms might
10. What is the purpose of having a two-tier system of boards of directors in countries such
as Germany? How does the dual board approach ameliorate the potential conflicts in the
principal-agent relationship between investor and manager?
The two-tier structure for board directors consists of a Management Board and the Supervisory Board. The
Management Board generally performs the duties and responsibilities of senior management of a
corporation. The group is charged with the day-to-day managing of the corporation to benefit the various
stakeholder groups. The Supervisory Board appoints, supervises, and advises the members of the
Management Board on polices but does not participate in the day-to-day management. Shareholders at the
annual meeting elect members of the Supervisory Board. Members are non-management, and may include
employee representatives. Other members include: shareholders holding 25% or more of the company’s
stock; other block-holders of stock, including other business enterprises; wealthy families; and large
commercial banks. A major issue for corporate governance in Germany is that ownership structures are
11. What is meant by the “true and fair view” override? When might it be applied? Do you
think the application of this principle leads to more useful financial statements from a
representational faithfulness perspective? Why or why not?
A true and fair view is the governing criterion by which financial statements are judged. It is possible to
override the requirements of a standard in order to give a true and fair view. Such an override on the
reporting of Enron’s SPEs would have helped detail a true and fair view of Enron’s total responsibilities of
The issue of representational faithfulness means do the statements present the underlying
economic realities of the business? The true and fair view override is designed to accomplish this exact
goal. If a different accounting and presentation would better reflect economic reality, then the company
should deviate from the standard and report the matter in a way that enhances representational faithfulness.
12. One provision of the UK Bribery Act is that it applies to bribes that occur anywhere in
the world by non-UK companies that conduct any part of their business in the United Kingdom.
For example, the Bribery Act would cover a company that has a few employees working in the
United Kingdom or that simply sells its goods or services in the United Kingdom. Evaluate this
policy from an ethical perspective using ethical reasoning. In particular, do you think the policy
is fair? Is it right?
The U.K. Bribery Law is using rights theory and the categorical imperative to determine that if a bribe
or facilitating payments is wrong in one culture, then it is wrong in all cultures. Is this fair? It is ethical
to not act consistently with one’s values based on justifications for different actions in different
situations? Being fair means treating like situations alike and unlike situations differently. The fairness
The Rights Theory is stricter and it would be difficult to justify the U.S. distinction between a
facilitating payment and bribe under this theory. If it is wrong to make payments to influence behavior,
13. What is the “comply or explain” principle an ethical approach to corporate governance?
Why or why not?
The comply-or-explain principle requires an explanation of noncompliance with corporate governance
provisions of the European Union (E.U.) and German Corporate Governance Code. This principle requires
honesty, integrity and transparency in company reporting. It leaves the decisions about the appropriateness
of a company’s governance arrangements in the hands of its management; it encourages companies to
follow accepted best practices (to be effective, good governance needs to be implemented in a way that fits
the culture and organization of the individual company); it enables codes to set a more demanding
14. What is the purpose of having a Global Code of Ethics? Do you think a Global Code is
necessary given that codes of ethics already exist for public companies in virtually all countries?
The Global Code of Ethics establishes ethical requirements for professional accountants performing
services in the global business arena. The Global Code is necessary so that all accountants adhere to a
The IFAC code uses a conceptual framework approach to evaluate relationships or circumstances that
raise ethical issues. It requires in many situations that professionals identify and analyze threats to their
independence and apply appropriate “safeguards” that eliminate those threats or reduce threats to an
acceptable level. The IFAC code addresses most of the same areas as the AICPA code, such as objectivity,
[A good article appears in The Journal of Accountancy: “Comparing the Codes: AICPA and IFAC.” It can
be found at: http://www.journalofaccountancy.com/Issues/2010/Oct/20103002.htm].
15. IFRS for SMEs has been referred to as “IFRS lite.” One of the differences between full
IFRS and IFRS for SMEs is that full IFRS allows for judgment in making choices about proper
accounting, whereas IFRS for SMEs is much more rigid. From a stakeholder perspective, do you
think there should be a separate set of international accounting standards for small and medium-
sized entities? Why or why not?
IFRS for SMEs responds to the strong international demand from smaller, non-public companies for a
set of standards that are easier to apply than full-IFRS and that better pertain to their model of
business. The IASB developed this standard in recognition or the difficulty and cost to private
companies of preparing fully compliant IFRS information. It also recognizes that users of private entity
One issue you might raise with students is the teaching aspect that if IFRS must be learned and now
16. How do Gray’s accounting values establish a basis for financial reporting in countries with
different cultural systems?
Gray uses Hofstede’s values to identify four widely recognized accounting values that can be used to define
a country’s cultural foundation with respect to financial reporting:
1. Professionalism (preference for professional judgment) versus statutory control
(compliance driven prescriptive legal requirements)
2. Uniformity (consistency across companies in the use of accounting practices)
versus flexibility (choice of accounting practice in accordance with the perceived
circumstances of individual companies)
From an accounting perspective, high conservatism implies a tendency to defer the recognition of assets
and items that increase net income while reserving for possible future declines in earnings. Within
Hofstede’s framework, higher levels of conservatism are most closely linked with countries that have
17. How might earnings management practices serve to project the managerial style of firms in
managing the earnings of the firms? Explain how cultural variables, such as those identified by Gray
and discussed in this chapter, might impact managerial style and earnings management techniques.
Earnings management practices include the choice of accounting policies which the management chooses
to reflect the company and the industry. These choices reflect the managerial style of the firms. Earnings
18. Ernst & Young released its 2011 European Fraud survey that includes a warning against the
manipulation of asset impairment writedowns due to the subjective factors used and judgment
needed to draw conclusions about the proper amount of writedowns. The PCAOB found 123 audit
deficiencies related to asset-valuation problems found among clients of the Big Four accounting firms
in 2010, making asset valuation the most common problem. How do the rules for determining the
impairment of long-lived assets explained in the chapter contribute to the possibility of audit
deficiencies? Is this an area where GAAP should be converged with IFRS, or vice versa?
The accounting for impairment of long-lived assets to be held and used depends on judgments of fair value.
Generally, if the fair value of the asset is less than the carrying amount of the asset, an impairment loss is
recognized. Under U.S. GAAP—SFAS 144 an impairment loss exists when the financial statement carrying
amount exceeds its fair value and is not recoverable. A carrying amount is not recoverable if it is greater
than the sum of the undiscounted cash flows expected from the asset’s use and eventual disposal. FASB
defines impairment loss as the amount by which the carrying value exceeds an asset’s fair value. Thus, the
IFRS provides (in IAS 36) that an impairment loss is recognized when the carrying amount is greater
than the “recoverable amount.” The recoverable amount is the greater of the fair value minus costs to sell
and the value in use (i.e., the present value of future cash flows expected to be derived from the asset). The
In looking at the rules to account for impairment losses under IAS 36, it is hard to see how IFRS is truly a
principles-based system when the standards are based on rules that have to be interpreted and reevaluated
every year. GAAP also requires professional judgment but does not reevaluate every year. Perhaps the two
19. The 2011 Bribe Payers Index by Transparency International’s (TI) ranks the world’s largest
economies according to the likelihood of firms from these countries to bribe when doing business
abroad. TI asked 3,016 senior business executives in 28 countries around the world for their
perceptions of the likelihood of companies, from countries they have business dealings with, to
engage in bribery when doing business in the executive’s country. Countries are scored on a scale of
0-10, where a maximum score of 10 corresponds with the view that the companies from that country
never bribe and a 0 corresponds with the view that they always do. Here are the rankings.
Transparency International 2011 Bribe Payer’s Index
Rank Country/Territory SCORE
1 Netherlands 8.8
1 Switzerland 8.8
3 Belgium 8.7
4 Germany 8.6
4 Japan 8.6
6 Australia 8.5
6 Canada 8.5
8 Singapore 8.3
8 United Kingdom 8.3
10 United States 8.1
11 France 8.0
11 Spain 8.0
13 South Korea 7.9
14 Brazil 7.7
15 Hong Kong 7.6
15 Italy 7.6
15 Malaysia 7.6
15 South Africa 7.6
19 Taiwan 7.5
19 India 7.5
19 Turkey 7.5
22 Saudi Arabia 7.4
23 Argentina 7.3
23 United Arab Emirates 7.3
25 Indonesia 7.1
26 Mexico 7.0
27 China 6.5
28 Russia 6.1
Average 7.8
From a cultural and a corporate governance perspective are you surprised by the results that show
Germany (#4), the U.S. (#10), India (#19), and China (#27)? What are the ethical implications for a
U.S. company doing business in each of these countries?
The TI Index indicates that companies from Germany rarely engage in bribery while doing business in
other countries; companies from the U.S. engage in bribery more than companies from Germany but less
than all companies on average (may be due to facilitating payments); companies from India engage in
bribery above average of companies from other countries; and companies from China engage in bribery
more often than companies from other countries except for Russia. For a U.S. company doing business in
20. The issue of responsibility is foundational to understanding organizational ethics. Explain
what this means in a global context.
A responsible person carefully reflects on alternative courses of action using ethical principles, acts
diligently, and perseveres in carrying out moral action. An organization, likewise, would use ethical
principles, act diligently and persevere in carrying out moral action. Honesty, integrity and trust are the
bases for sound business relationships and organizations; these are the values that a responsible
organization is built. A strong ethics foundation is essential to act in accordance with the established
standards of ethical behavior whether the company operated solely in the U.S., in another country or many