978-1259535437 Chapter 6 Part 1

Chapter 06 – The Role of Government

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CHAPTER 6

The Role of Government

Table of Contents

Chapter Summary 6-2

Learning Outcomes 6-2

Frontline Focus: “Too Much Trouble” Questions 6-2

Learning Outcome 1 6-3

Learning Outcome 2 6-3

Learning Outcome 3 6-5

Learning Outcome 4 6-7

Learning Outcome 5 6-7

Life Skills 6-8

Progress ✓Questions 6-8

Ethical Dilemma 6-12

Frontline Focus: “Too Much Trouble—Susan Makes a Decision” Questions 6-14

Key Terms 6-14

Review Questions 6-16

Review Exercises 6-17

Internet Exercises 6-18

Team Exercises 6-20

Thinking Critically 6-22

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Chapter Summary

This chapter steps outside of the organizational framework and examines what legislation the

government has put into place to enforce ethical conduct. The Foreign Corrupt Practices Act

attempts to send a clear message that U.S. overseas corporations are based on price and product

quality. The U.S. Federal Sentencing Guidelines were put into place in 1984 to hold businesses

liable for the criminal acts of their employees and agents. The Sarbanes-Oxley Act has 11 titles

that cover the financial management of business containing examples of corporate wrongdoing

that preceded the establishment of the legislation. The Dodd-Frank Wall Street Reform and

Consumer Protection Act was enacted to combat perceived corporate mistreatment of consumers

after the 2008 crash in the financial sector.

Learning Outcomes

After studying this chapter, the student should be able to:

1. Identify the five key pieces of U.S. legislation designed to discourage, if not prevent, illegal

conduct within organizations.

2. Understand the purpose and significance of the Foreign Corrupt Practices Act (FCPA).

3. Calculate monetary fines under the three-step process of the U.S. Federal Sentencing

Guidelines for Organizations (FSGO).

4. Compare and contrast the relative advantages and disadvantages of the Sarbanes-Oxley Act

(SOX).

5. Explain the key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection

Act.

Extended Chapter Outline

Frontline Focus

“Too Much Trouble” Questions

1. The Sarbanes-Oxley Act created an oversight board for all auditing firms. Look at the

outline of the act on pages 122–123 for more information on the Public Company

Accounting Oversight Board (PCAOB). Would the PCAOB endorse trying to dump a

prospective client in this manner?

Students’ answers may vary. The PCAOB was created as an independent oversight body as

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standards and enforcing rules and disciplinary procedures for those organizations that found

themselves out of compliance. In this scenario, the PCAOB would not encourage the firm to

take on a client that they could not accurately and adequately spend time auditing; however,

it is not ethical to create such a high quote to drive away the client.

2. Is being too busy with other clients a justification for deliberately driving this customer

away?

3. What should Susan do now?

Learning Outcome 1: Identify the Five Key Pieces of U.S. Legislation Designed to

Discourage, if not Prevent, Illegal Conduct within Organizations.

• For those organizations that have demonstrated that they are unable to keep their own

house in order by maintaining a strong ethical culture, the last line of defense has been a

legal and regulatory framework that offers financial incentives to promote ethical behavior

and imposes penalties for those that choose not to adopt such behavior.

Learning Outcome 2: Understand the Purpose and Significance of the Foreign Corrupt

Practices Act (FCPA).

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• By passing the FCPA, Congress was attempting to send a clear message that the

competitiveness of U.S. corporations in overseas markets should be based on price and

product quality rather than the extent to which companies had paid off foreign officials and

political leaders.

• The FCPA focuses on two distinct areas:

o Disclosure—the FCPA requirement that corporations fully disclose any and all

transactions conducted with foreign officials and politicians, in line with the SEC

o Routine governmental action is any regular administrative process or procedure,

excluding any action taken by a foreign official in the decision to award a new or

continuing business. Examples include:

➢ Providing permits, licenses, or other official documents to qualify a person to

do business in a foreign country

➢ Providing phone service, power, and water supply, loading and unloading

cargo, or protecting perishable products or commodities from deterioration

➢ Performing acts of a similar nature

• The key distinction in identifying bribes was exclusion of any action taken by a foreign

official in the decision to award new or continuing business.

o Such decisions, being the primary target of most questionable payments, were not

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and 20 years’ imprisonment for individuals and up to $25 million for organizations.

Learning Outcome 3: Calculate Monetary Fines under the Three-Step Process of the U.S.

Federal Sentencing Guidelines for Organizations (FSGO).

• The U.S. Federal Sentencing Commission was established in 1984 by the Comprehensive

Crime Control Act and was charged with developing uniform sentencing guidelines for

offenders convicted of federal crimes.

o In 1991, Chapter 8 was added to the guidelines.

o Chapter 8 is more commonly known as Federal Sentencing Guidelines for

Organizations.

• Federal Sentencing Guidelines for Organizations (FSGO) hold businesses liable for the

criminal acts of their employees and agents.

process:

o Step 1: Determination of the “Base Fine”—the base fine will normally be the

greatest of:

➢ The monetary gain to the organization from the offense.

➢ The monetary loss from the offense caused by the organization, to the extent

the loss was caused knowingly, intentionally, or recklessly.

➢ The amount determined by a judge based on an FSGO table.

o Step 2: The Culpability Score—the culpability score is the calculation of a degree of

➢ Mitigating factors

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✓ The organization had an effective program to prevent and detect

violations of law.

✓ The organization self-reported the offense to appropriate governmental

authorities, fully cooperated in the investigation, and accepted

o Reporting the business’s financial condition to the court on a periodic basis

o Remaining subject to unannounced examinations of all financial records by a

designated probation officer and/or court-appointed experts

o Reporting progress in the implementation of a compliance program

o Being subject to unannounced examinations to confirm that the compliance program

is in place and is working

• The best way to minimize an organization’s culpability score is to make sure that you have

some form of program in place that can effectively detect and prevent violations of law—a

compliance program.

o Compliance with standards and procedures

o Delegation of substantial discretionary authority

o Consistent discipline

o Response and corrective action

• In May 2004, the U.S. Sentencing Commission proposed to Congress that there should be

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o The guidelines defined accountability more clearly. Corporate officers are:

➢ Expected to be knowledgeable about all aspects of the compliance program

➢ Required to receive formal training as it relates to their roles and

responsibilities within the organization

Learning Outcome 4: Compare and Contrast the Relative Advantages and Disadvantages

of the Sarbanes-Oxley Act (SOX)

• The Sarbanes- Oxley Act (SOX) is a legislative response to the corporate accounting

scandals of the early 2000s that covers the financial management of businesses.

o It became law on July 30, 2003. The act contains 11 sections, or titles, and almost 70

subsections covering every aspect of the financial management of businesses.

➢ Title I: Public Company Accounting Oversight Board—the Public Company

Accounting Oversight Board (PCAOB) is an independent oversight body for

auditing companies.

➢ Title II: Auditor Independence

➢ Title III: Corporate responsibility

➢ Title IV: Enhanced Financial Disclosures

Learning Outcome 5: Explain the Key Provisions of the Dodd-Frank Wall Street Reform

and Consumer Protection Act.

• The Dodd-Frank Wall Street Reform and Consumer Protection Act is a legislation that

was promoted as the “fix” for the extreme mismanagement of risk in the financial sector

that led to a global financial crisis in 2008-2010.

o It was implemented on July 21, 2010.

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➢ It is empowered to act if a bank with more than $50 billion in assets “poses a

Life Skills

Governing your Own Ethical Behavior

This Life Skills box discusses how our own personal value system represents the cumulative

effect of a series of influences in our life. As such our ethical standards already represent a

framework of the influences that makes us the person we are today. Developing a clear sense of

personal values is as much about knowing what one isn’t willing to do as it is about knowing

what one is willing to do. Understanding the difference allows us to remain grounded and

focused while those around us wonder in search of someone to help them make a decision.

Progress ✓ Questions

1. What was the primary purpose of the FCPA?

2. What was the maximum fine for a U.S. corporation under the FCPA?

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3. Which two distinct areas did the FCPA focus on?

4. List four examples of routine governmental action.

Examples of routine governmental actions include:

• Providing permits, licenses, or other official documents to qualify a person to do

5. What are the three steps in calculating financial penalties under FSGO?

6. What is the maximum fine that can be levied?

7. What is the maximum term of organizational probation?

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8. What is the “death penalty” under FSGO?

9. Explain the seven steps of an effective compliance program.

The FSGO prescribes the following seven steps for an effective compliance program:

• Management oversight—a high-level official must be in charge of and accountable for

the compliance program.

10. What are aggravating and mitigating factors?

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11. Explain the risk assessments required in the 2004 Revised FSGO.

12. What were the three key components of the 2004 Revised FSGO?

The revised guidelines, which Congress formally adopted in November 2004, made the

following three key changes:

13. Explain the role of the PCAOB.

The PCAOB is an independent oversight body for auditing companies. In addition, as an

14. Which title requires CEOs and CFOs to certify quarterly and annual reports to the SEC?

15. Which title protects employees of companies who provide evidence of fraud?

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who provide evidence of fraud.

16. What are the five key requirements for auditor independence?

The Sarbanes-Oxley Act introduced the following five key directives to enforce the

independence of auditors and hopefully restore public confidence in independent audit

reports:

Ethical Dilemma

6.1 – The Bribery Gap

1. Is it ethical for U.S. regulations to put U.S. companies at an apparent disadvantage to their

foreign competitors? Explain why or why not.

2. If foreign companies pay bribes, does that make it OK for U.S. companies to do the same?

Explain why or why not.

3. If you could prove that new jobs, new construction, and valuable tax revenue would come to

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the United States if the bribe were paid, would that change your position? Explain your

answer.

4. It would seem that the playing field will never be level—someone will always be looking for

a bribe, and someone will always be willing to pay it if she or he wants the business badly

enough. If that’s true, why bother to put legislation in place at all?

6.2 – An Unethical Way to Fix Corporate Ethics?

1. SOX has introduced sweeping changes in the name of enforcing corporate ethics. Is it really

a “fair” piece of legislation? Explain your answer.

Students’ responses will vary. When comparing large versus small companies, the Sarbanes–

2. Do U.S. ethical problems give us the right to demand ethical controls from international

companies based outside the United States?

3. Does the decision to increase auditing requirements seem to be an ethical solution to the

problem of questionable audits? Explain your requirements.

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seem to be an ethical solution, but one that provides a limitation or reduction of corporate

scandals. There will always be those firms or executives that will find a way to manipulate

the legislation and continuously act in unethical ways.

4. If there were more than four large accounting firms in the marketplace, would that make the

decision more ethical? Explain your answer.

Frontline Focus

“Too Much Trouble—Susan Makes a Decision” Questions

1. What could Susan have done differently here?

2. What do you think will happen now?

3. What will be the consequences for Susan, Steven Thompson, and their auditing firm?

Key Terms

Consumer Financial Protection Bureau (CFPB): A government agency within the Federal

Reserve that oversees financial products and services.