Ethical Obligations and Decision Making in Accounting, 4/e 1
Chapter 3 Discussion Questions
Suggested Discussion and Solutions
1. In her book The 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 you think Jennings meant by this
statement in the context of the giving voice to values discussions in Chapter 2.
Jennings discusses that it’s not “the first mistake that an organization makes that brings it
down. It’s the second mistake, the cover-up, and everything that follows that brings
ethical collapse.” She notes that an ethical culture alone will not prevent an ethical lapse.
That’s because humans run the organizations. As long as there are humans there will be
mistakes and ethical lapses. How those mistakes and ethical lapses are reported, to whom
they are reported, and how those mistakes and ethical lapses are then treated determine
whether it leads to ethical collapse.
2. Have you ever been faced with a personal dilemma whether to blow the whistle on
wrongdoing? What did you do and why? How did elements of the giving voice to
values framework influence your decision?
Ask the students if they have ever observed cheating on a test? Did they consider telling
the instructor? What happened?
Did their friends rationalize the action and ask you to ignore what you have observed?
The friends may say: we need to make a certain grade on the test; everyone cheats
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(rationalization of standard practice); and the professor’s tests are unfairly difficult. They
might also argue that this is the one and only time that they had cheated (isolated
incident) and that they only used 2 answers from their neighbor (materiality). Then they
say that you owe them loyalty as their friend not to tell the instructor.
3. Identify a company that you believe has an ethical culture. Explain why you selected
that company.
Students might mention Starbucks, Apple, Google or many other companies based upon
the company’s reputation in the press or how cool or hot the products of the company.
You might consider having students do some research on the company they mention. If
your school has library databases of Lexis Nexis or Audit Analytics, have the students
4. One way of analyzing whether NSA whistleblower Edward Snowden’s actions were
justified in leaking classified materials exposing the breadth of the U.S.
government’s surveillance activities is by weighing personal morality against the
morality that comes with one’s professional role they have adopted. Using this
perspective, do you believe Snowden’s act was ethical?
Was Snowden’s whistleblowing justified? If so, was he also right to flee the United
States rather than face legal sanctions?
One viewpoint would be that the threat to individual privacy and the laws (both
international and U.S.) justifies becoming a whistleblower. Snowden emailed and worked
with Glenn Greenwald, a writer for Guardian US, to release the files. Greenwald later
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When explaining his decision to blow the whistle, he appealed to the U.S. Constitution,
but also to international law, the Universal Declaration of Human Rights, and the 1945
Nuremberg declaration that “individuals have international duties which transcend the
national obligations of obedience.” In a manifesto shared with Greenwald, he ominously
warned of “national relativism,” a mindset in which people ignore their own country’s ills
and instead conveniently look “toward distant, external evils.” Our primary duty, he
insisted, should be to police our “own government before seeking to correct others.”
5. How does employee perceptions of commitment, integrity, and transparency in the
workplace contribute toward creating an ethical corporate culture?
Perceptions become our reality, so employees’ perceptions of the workplace are very
important. An ethical corporate culture encourages its employees to display commitment
or loyalty, integrity and transparency. The strongest encouragement would be for the
officers, managers, and supervisors to set the tone at the top by setting an example of
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6. It has been said that recent graduates from a business school majoring in
accounting and just entering the profession are especially vulnerable to ethical
missteps because they are often naive and may not see the ethical aspects of
situations they confront. Explain the various dimensions of such alleged ethical
challenges in the workplace.
One of the ethical challenges in the workplace is that a new employee may see or
understand only a small part of the situation and is making assumptions about the whole
picture. This may lead to the employee drawing the wrong conclusions or ignoring
warning signs of unethical actions. The employee may be asked to do the debit side of the
7. Explain how “group–think” might lead a person to ignore moral and ethical duty in
an organization.
Group-think can occur within a group of people, in which the desire for harmony or
conformity in the group results in an irrational or dysfunctional decision-making
outcome. Group members may try to minimize conflict and reach a consensus decision
without critical evaluation of alternative viewpoints, by actively suppressing dissenting
viewpoints, and by isolating themselves from outside influences. This can be especially
8. Do you believe that employees who observe more occupational fraud in their
organizations are more likely to engage in occupational fraud themselves?
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You might ask the students what they have observed in their jobs. Or if the students
observe a lot of students cheating in a certain class, are they more likely to cheat also?
Why or why not?
Using Burchard’s Ethical Dissonance model, if an employee observes occupational fraud
by many of the employees, and the employee has low morals (low-low fit), then he may
be more likely to commit occupational fraud himself. But if the employee has high
9. The following questions are about corporate governance and executive
compensation.
o (a) How does agency theory address the issue of executive compensation?
o (b) How might stakeholder theory argue against the current model of
executive compensation in the U.S.?
o (c) What is meant by the statement: “Compensation systems always become
in part end and not simply means?”
(a) Agency theory concerns the difficulties in motivating management (i.e., the agent) to
act in the best interests of the shareholders (i.e., principal). Agency theory tries to solve
this problem by linking management compensation to the financial performance of the
firm or to the performance of the company’s stock. This theory encourages management
to increase stock prices and dividends; then management is rewarded for doing so by
increased compensation.
(b) In the traditional view of the firm or the shareholder view, the shareholders or
stockholders are the owners of the company, and the firm has a binding fiduciary duty to
put their needs first, to increase value for them. However, stakeholder theory argues that
there are other parties involved, including governmental bodies, political groups, trade
associations, trade unions, communities, financiers, suppliers, employees, and customers.
Sometimes even competitors are counted as stakeholders – their status being derived from
their capacity to affect the firm and its other morally legitimate stakeholders. Using this
theory, all stakeholders should be considered and management should work to increase
10. The issue of the size of executive compensation packages is explored in the text. The
highest paid CEO in 2014 was David Zaslav, the CEO of Discovery
Communications, whose total executive compensation package was $156.1, the vast
majority of which was from stock awards. Critics claim that CEOs receive excessive
executive compensation packages when compared with the average worker.
Consider that LeBron James took in $64.8 million in 2014, the majority of which
was from endorsements, while Howard Stern earned $95 million? Are the top paid
corporate executives overpaid when compared to top entertainers? Why or why
not?
Students might also consider how football coaches are often the highest paid individual at
a university, often 500% to 5,000% more than the average faculty member. Are top
coaches overpaid compared to the faculty at the university? Yes, winning at football
brings in donations (but is that dependent on how much the coach is paid?), and having
11. Five months before the new 2002 Lexus ES hit showroom floors, the company’s U.S.
engineers sent a test report to Toyota City in Japan: The luxury sedan shifted gears
so roughly that it was “not acceptable for production.” Days later, another Japanese
executive sent an email to top managers saying that despite misgivings among U.S.
officials, the 2002 Lexus was “marginally acceptable for production.” The new ES
went on sale across the nation on October 1, 2001.
In years to come, thousands of Lexus owners discovered that some of the vehicles
had transmission problems, which caused it to hesitate when motorists hit the gas or
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lurch forward unintentionally. The 2002–2006 ES models would become the target
of lawsuits, federal safety investigations, and hundreds of consumer complaints,
including claims of 49 injuries.
In an August 15, 2005, memo explaining the company’s position, a staff attorney
wrote: “The objective will be to limit the number of vehicles to be serviced to those
owners who complain and to limit the per-vehicle cost.”
In 2010, Toyota was fined a record $16.4 million for delays in notifying U.S. federal
safety officials about defects that could lead to sudden acceleration.
Do you believe national culture might have played a role in how Toyota handled the
matter? What about corporate culture? What are the similarities between the
Toyota case and the Ford and GM situations discussed in the chapter?
A review of the Ford Pinto situation: The Ford Pinto experienced fires easily in rear-end
collisions with the gas tanks being right behind the license plate. Ford did a risk-benefit
analysis to aid decision making. Ford relied on ethical legalism to justify and rationalize
its actions. Ford used act-utilitarian reasoning that focused only on costs and benefits and
ignored rights of the various stakeholders. A rule-utilitarianism or rights theory approach
might have led Ford to follow a rule of not sacrificing public safety or that the public had
a right to expect that cars will not blow up if there is a rear collision at low speeds.
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billion settlement with the Justice Department, the largest-ever U.S. criminal penalty for
a car company.
The Lexus acceleration problem seems to show moral blindness and group-think on the
part of the firm. The firm may have felt pressure to maintain leadership and quality in the
auto market. It is interesting to note that in the U.S. such moral blindness tends to be a
problem of management perhaps motivated by greed or to enhance incentive pay. With
Lexus, the motivating factor seems to benefit the firm and quality leadership. However,
the moral blindness led to ignoring and covering up the problem by doing a limited cost
analysis as was done in the Ford Pinto case.
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12. The 2011 National Business Ethics Survey defines “active social networkers” as
people who spend more than 30 percent of the workday participating on social
networking sites. According to the results of the survey, active social networkers air
company linen in public. Sixty percent would comment on their personal sites about
their company if it was in the news, 53% say they share information about work
projects once a week or more, and more than a third say they often comment, on
their personal sites, about managers, coworkers, and even clients. What are the
dangers of such behavior for the employee and employer?
The danger to the employer of such behavior is loss of reputation and having to respond
to rumors and criticisms about the company. The posting by the employee is often a one
sided picture of the company and may not present all the facts. The employer and
company may not be able to disclose all the facts at that time. The posting may also
13. Brief and Motowidlo define prosocial behavior within the organizational setting as
“behavior which is (a) performed by a member of an organization, (b) directed
toward an individual, group, or organization with whom she interacts while
carrying out her organizational role, and (c) performed with the intention of
promoting the welfare of the individual, group, or organization toward which it is
directed.”
The researchers on whistleblowing using this model have generally argued that
stages 5 and 6 represent cognitive moral development consistent with prosocial
behavior. Discuss why stages 5 and 6 of Kohlberg’s model are more likely to be
associated with prosocial behavior than lower stages of moral development.
The Preconventional level, stages 1 and 2 are very self-centered for the individual, or
reasoning using egoism. The Conventional level, stages 3 and 4 are the individual
becoming aware of the interests of others and duty to society while still self-centered for
the individual, or more reasoning using enlightened egoism. At first glance it may seem
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14. What is the link between the internal control environment and accountability?
A primary responsibility of directors and officers is to ensure that the organization is
accountable for its products and services, and finances to its shareholders, investors,
creditors, the public and government regulators. Accountability requires that the
organization comply with all applicable laws and ethical standards; adhere to the
organization’s mission; create and adhere to conflict of interest, ethics, personnel and
15. The Committee of Sponsoring Organizations (COSO) explains the importance of the
control environment to internal controls by stating that it sets the tone of an
organization, influencing the control consciousness of its people. It is the foundation
for all aspects of internal control, providing discipline and structure. Explain what
is meant by this statement.
The control environment includes the company’s history, values, tone at the top,
organizational structure, operating style, board of directors, audit committee,
management attitude towards risk, management commitment to quality, use of authority
and responsibility within the company, communications, human resource policies and
procedures, and the training and development of personnel. The size of the company
16. It has been argued that an organization that does not support those that whistle
blow because of violation of professional standards is indicative of a failure of
organizational ethics. Explain what you think this statement means from the
perspective of corporate culture.
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An organization that does not support whistleblowing due to the confidentiality
obligation of the profession ignores the obligation to the public interest. It also ignores
the objectivity, honesty and integrity obligations and gives loyalty only to the clients.
Such a corporate culture would have low ethical values. It brings into question whether
the organization can be counted on to act ethically when conflicts exist and whether it is
trustworthy.
Extended Discussion
Whistleblowing results from a deficiency/failure of the ethical environment of the
organization to focus on its accountability to serve the public good. Individuals may
believe they must take a stand for the wrongdoing in the organization. Organizations that
wish to protect themselves from public embarrassment stemming from whistleblowing
need to establish a sound ethical culture. Whistleblowing may not be necessary if the
organization provides a safe way to discuss and manage ethical concerns. An
Accountability is possible only when the rules are clear and management is willing to
hold all to these explicit expectations. An ombudsperson would be helpful in achieving
accountability because such a person symbolizes openness to opposition. This individual
would be the internal recipient of employees’ reports that could include accusations of
wrongdoing and potential ethics/code of conduct violations. The very existence of this
centralized outlet may encourage internal reporting, rather than external whistleblowing.
When employees know they can stop wrongful conduct, both morale and organizational
Business Law Journal, 40(1), 177-236 (2002).
Central to this reliance is protection from retaliation, regardless of the issue or persons
involved.
Aspiration aims for excellence in ethical principles, rather than compliance with rules.
17. Evaluate the ethics of the practice of whistleblowing from the perspectives of virtue,
rights theory, and utilitarianism.
Michael Davis considers whistleblowing is a moral obligation when it used to prevent
serious harm to others and with little cost to the whistleblower. The application of rights
theory means a categorical imperative exists to do whatever it takes to stop fraudulent
behavior regardless of whether a particular action might bring more benefits than harm to
Extended Discussion
Michael Davis identifies three paradoxes of whistleblowing. The first paradox is the
‘paradox of burden’ which is the burden imposed on the whistle blower. When an
individual ‘blows the whistle’ they experience hostility from their employer and other
employees and in most cases have to resign from their workplace.
5
The second paradox is the ‘paradox of missing harm’ which is when there is no real
danger from the wrongdoing so it is not worthwhile for the employee to blow the whistle.
There must be serious harm in order to justify whistle blowing. The third paradox is the
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18. Just because a person has a right to blow the whistle, does that mean she has a duty
to blow the whistle? How might we make that determination?
The rights of one party or sets of parties establishes our ethical duties to them from a
Rights perspective. Using other perspectives, more of a weighing of harms and benefits
take place and duties determined based on a rational calculation (i.e., Utilitarianism). A
whistle blower has a duty to blow the whistle when prescribed conditions have been met
19. How do the concepts of cognitive dissonance and organizational/ethical dissonance
relate to whether an accountant might choose to blow the whistle on corporate
wrongdoing?
The components of Burchard’s model of cognitive dissonance and organizational/ethical
dissonance are the moral intensity of the organization and the individual. Moral intensity
may be considered high or low. High moral intensity means a higher risk exists because
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20. Explain how we might evaluate auditors’ whistle-blowing intentions? Why would
this be important to do?
Auditors have an obligation of confidentiality to their clients. Confidentiality should be
set aside only when the obligation to the public interest requires a disclosure of public
harm. Motivation or intentions of auditors’ whistleblowing will be determined by judging
the potential public harm of fraudulent financial reporting. This is important to ensure
that auditors are acting in accordance with virtues, rights and utilitarianism theories and
not out of self-interest or loyalty to the clients of the auditors’ firm.
Extended Discussion
Alleyne and Hudaib develop a conceptual model for whistle-blowing intentions among
external audit practitioners. The authors propose that key individual-level antecedents are
closely related to whistle-blowing intentions, and are moderated by team, organizational
and issue-specific factors. Their proposed model is positively influenced by the
propensity to blow the whistle, and the moral, organizational and social commitment for
protecting public interest and negatively influenced by the prevailing organizational
milieu and high personal cost of reporting.
21. Explain how internal auditors’ sensitivity to ethical dilemmas might be influenced
by corporate governance mechanisms.
The ethics of an individual internal auditor influences the values one brings to the
workplace and decision making, while the ethical culture of the organization influences
the behavior of the internal auditor. An organization that values profits above all else
might elicit an internal auditor to go along to get along and go along with improper
22. On October 24, 2013, the Second Circuit Court of Appeals ruled that a tipster who
provided information to the SEC about illegal payments to foreign government
officials by Stryker Corporation under the Foreign Corrupt Practices Act (FCPA)
was not eligible to receive a Dodd-Frank award because his information was
provided before the Act went into effect in 2010. Stryker had made those payments
between August 2003 and February 2008. The Commission ruled the company had
incorrectly described the unlawful payments in its books and records and failed to
devise and maintain an adequate system of internal accounting controls, as required
under the FCPA. Stryker was fined $13.3 million: $7.5 M in disgorgement; $2.3M in
prejudgment interest; and a $3.5 M civil penalty. Do you believe the court’s opinion
was ethical from s fairness perspective? From a rights perspective? Explain.
Ask the students how they would feel about an instructor who changed the rules for
grading in a course retroactively? It might depend on whether the student was harmed or
not by the change. What if the student is not harmed by the change and benefited by a
sizable increase in her grade, but most of her friends in the class were harmed? Does it
seem fair to all?
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23. The following relates to the Menendez – Halliburton situation described in the text.
o (a) How would you characterize Halliburton’s accounting for revenue from
ethical and professional perspectives?
o (b) Once KPMG learned that Menendez had provided a complaint to
Halliburton’s audit committee highlighting questionable accounting and
auditing practices, the KPMG audit partner instructed the audit team
members to avoid communications with Menendez. How would you
characterize those actions ethically and professionally?
(a) Halliburton’s accounting for revenues is recording future sales in the current period.
From a professional perspective, this is a violation of GAAP since as the company was
recognizing revenue when the equipment had yet to be built (future services remained to
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24. “Give me the ‘McFacts,’ ma’am, nothing but the McFacts!” So argued the defense
attorney for McDonald’s Corporation as she questioned Stella Liebeck, an 81-year-
old retired sales clerk, two years after her initial lawsuit against McDonald’s
claiming that it served dangerously hot coffee. Liebeck had bought a 49-cent cup of
coffee at the drive-in window of an Albuquerque McDonald’s, and while removing
the lid to add cream and sugar, she spilled the coffee and suffered third-degree
burns of the groin, inner thighs, and buttocks. Her suit claimed that the coffee was
“defective.” During the trial, it was determined that testing of coffee at other local
restaurants found that none came closer than 20° to the temperature at which
McDonald’s coffee is poured (about 180°F). The jury decided in favor of Liebeck
and awarded her compensatory damages of $200,000, which they reduced to
$160,000 after determining that 20 percent of the fault belonged with Liebeck for
spilling the coffee. The jury then found that McDonald’s had engaged in willful,
reckless, malicious, or wanton conduct, the basis for punitive damages. It awarded
$2.7 million in punitive damages. That amount was ultimately reduced by the
presiding judge to $480,000. The parties then settled out of court for an unspecified
amount reported to be less than the $480,000.
For its part, McDonald’s had suggested that Liebeck may have contributed to her
injuries by holding the cup between her legs and not removing her clothing
immediately. The company also argued that Liebeck’s age may have made the
injuries worse than they might have been in a younger individual, “since older skin
is thinner and more vulnerable to injury.”
Who is to blame for the McSpill? Be sure to support your answer with a discussion
of personal responsibility, corporate accountability, and ethical reasoning?
Some key facts of this case are whether McDonalds knew their coffee was too hot and
whether they had alternatives to taking this risk with peoples’ well-being. Prior to the
Liebeck incident, McDonalds had been sued in similar circumstances and lost but the
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25. Is business ethics an oxymoron?
People never will stop repeating this cliché because, deep down, we know that it’s not
always easy to be ethical—in business or anywhere else in life! Sometimes it’s hard to
know what the right thing to do is. Because modern life is complex and fast-moving, we
sometimes are honestly perplexed about what ethics require in a particular quandary.
In more general terms, businesses must care about ethics because businesses are part of a
human community. Communities are held together by virtues and sound mores. As
Aristotle puts it, a person without ethics is more of a wild beast than a human being. We
all want to be treated with respect and care. We want to feel we can trust each other.
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Of course, none of this is to deny that some businesspeople lie, cheat and act in other
unscrupulous ways. But there are greedy doctors and ministers, too, and no one contends
that medical or ministerial ethics are mere oxymoron. Doctors treat sick patients who are