Business & Professional Ethics
for Directors, Executives &
Accountants, 8e
Leonard J. Brooks and Paul Dunn
Cengage Learning, Boston, MA, 2018
Chapter 6 – Professional Accounting in the Public
Interest
Chapter Questions and Case Solutions
Chapter Questions……………………………………………………………2
Case Solutions……………………………………………………………….10
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Chapter Questions
1. Answer the seven questions in the opening section of this chapter. [See Chapter 6, page 385.]
• Who really is my client—the company, the management, current shareholders, future
shareholders, the public?
SOX and IFAC have now spoken on this issue. See discussions in the chapter under Priority
• In the event I have to make a decision with ethical ramifications, do I owe primary loyalty to
my employer, my client, my boss, my profession, the public, or myself?
It depends on the significance of the decision, on who is acting ethically and who is not, but
• Am I, as a professional accountant, bound by professional standards even when acting as an
employee?
An employed professional accountant must follow the profession’s standards or be
• Is professional accounting a profession or a business? Can it be both?
Yes, but the problem comes when the drive for profit overtakes the need for the exercise of
• When should I not offer a service?
When the client is unethical, or the risk to reputation is too high, or there is a conflict of
• Can I serve two clients with competing interests at the same time?
Rarely can this be done effectively because an optimal decision for one client is rarely the
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• Is there any occasion when breaking the profession’s guideline against revealing confidences
is warranted?
Yes. The profession’s confidentiality guideline was not intended to protect those guilty of
2. What is meant by the term “fiduciary relationship“?
A relationship where the professional is dealing with a matter of vital significance to a another
3. Why are most of the ethical decisions accountants face complex rather than straightforward?
More than one stakeholder’s interests are involved and trade-offs between the interests of
4. When should an accountant place his or her duty to the public ahead of his or her duty to a client or
employer?
Because the public (in the form of future shareholders, lenders, customers etc.) is the ultimate
5. Which would you chose as the key idea for ethical behavior in the accounting profession: “Protect
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the public interest” or “Protect the credibility of the profession”? Why?
Protecting the public interest will, in the long run, protect the credibility of the profession.
6. Why is maintaining the confidentiality of client or employer matters essential to the effectiveness of
the audit or accountant relationship?
If it were known that an auditor or accountant were likely to disclose secrets related to
7. What is the difference between exercising “due care” and “exercising professional skepticism”?
“Due care” refers to a standard of thoroughness, comprehensiveness, and the exercise of
judgment in a manner similar to other properly qualified professionals in the circumstances.
8. Why did the SEC ban certain nonaudit services from being offered to SEC-registrant audit clients
even though it has been possible to effectively manage such conflict of interest situations?
Faced with the inability of one of the largest and most respected firms (Arthur Andersen) to
9. Where on the Kohlberg framework would you place your own usual motivation for making
decisions?
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10. Why do more professional accountants not report ethical wrongdoing? Consider their awareness
and understanding of ethical issues as well as their motivation and courage for doing so.
Frankly, although they are able to detect ethical wrongdoing, they may have misplaced loyalty
11. Which type of conflict of interest should be of greater concern to a professional accountant: actual
or apparent?
Per the discussion related to Figure 5.7 Types of Conflict of Interest and Actions Required, they
12. An auditor naturally wishes his or her activity to be as profitable as possible, but when, if ever, should
the drive for profit be tempered?
13. If the provision of management advisory services can create conflicts of interest, why are audit firms
still offering them?
14. If you were an auditor, would you buy a new car at a dealership you audited for 17% off list price?
No, this appears to be a more than nominal discount, not available to all, and which could be seen
15. If you were a management accountant, would you buy a product from a supplier for personal use at
25% off list?
16. If you were a professional accountant, and you discovered your superior was inflating his or her
expense reports, what would you do?
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17. Can a professional accountant serve two clients whose interest’s conflict? Explain.
18. If an auditor’s fee is paid from the client company, isn’t there a conflict of interests that may lead to a
lack of objectivity? Why doesn’t it?
Yes, this is a normal practice that could give management an opportunity to influence the
19. Why does the IFAC Code consider the appearance of a conflict of interests to be as important as a real
but non-apparent influence that might sway the independence of mind of a professional accountant?
20. What is the most important contribution of a professional code of conduct or corporate code of
conduct?
Codes provide guidance on the conduct expected of members of the profession or corporation
21. Are one or more of the fundamental principles found in codes of conduct more important than the
rest? Why?
I would argue that the first one listed – To, at all times maintain the good reputation of the
22. Was the “expectations gap” that triggered the Treadway and Macdonald Commissions, the fault of
the users of financial statements, the management who prepared them, the auditors, or the
standard setters who decided what the disclosure standards should be?
All of these to some degree. But the accounting profession and its members are involved in
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23. Why should codes focus on principles rather than specific detailed rules?
24. Is having an ethical culture important to having an effective system of internal control? Why or why
not?
Yes, because an effective system of internal control depends upon the integrity and ethical
25. What should an auditor do if he or she believes that the ethical culture of a client is unsatisfactory?
The auditor should immediately bring the matter to the attention of the person in charge of the
26. Are the governing partners of accounting firms subject to a “due diligence” requirement similar to
that for corporation executives in building an ethical culture? Can a firm and/or its governors be
sanctioned for the misdeeds of its members?
Yes. In some jurisdictions the firm can be disciplined and fined. Also, any lawsuit will require
27. An engineer employed by a large multidisciplinary accounting firm has spotted a condition in a
client’s plant that is seriously jeopardizing the safety of the client’s workers. The engineer believes
that the professional engineering code requires that this condition be reported to the authorities,
but professional accounting codes do not. How should the head of the firm resolve this issue?
After checking that the safety problem is serious and the engineer is correct in his or her
interpretation of his or her code, the senior partner should make sure that the client has been
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chapter.
28. Transfer pricing can be used to shift profits to jurisdictions with low or no tax to reduce the taxes
payable for multinational companies. If such profit shifting is legal, is it ethical? Was Apple well–
advised to shift $30 billion in profits to its Irish subsidiary, where it paid no corporate income taxes
on those profits? Why or why not?
No, it is not ethical because profits are being made in a jurisdiction, but a fair allocation of tax is
not being paid there. Artificially low tax rates also create tempting opportunities to transfer
29. Many professional accountants know of questionable transactions but fail to speak out against
them. Can this lack of moral courage be corrected? How?
Moral courage can be encouraged by:
• ethical corporate culture led by supportive senior management
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30. Why do codes of conduct or existing jurisprudence not provide sufficient guidance for accountants
in ethical matters?
New variations of problems are arising every day, and existing codes/jurisprudence
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Case Solutions
Famous Cases
1. Parmalat – Europe’s Enron (Chapter 6, pages 448–454)
What this case has to offer
Starting as an Italian milk producer in the Parma region, Parmalat grew to become a multinational
company, widely regarded as one of Europe’s most successful food businesses. However, Parmalat will
be remembered as one the biggest European corporate frauds, ever. The company’s bankruptcy caused
vast losses affecting multinational banks, investors in US and European markets, and tens of thousands
of employees and farmers.
Teaching suggestions and discussion
I start the case describing Parmalat’s business of the manufacture and distribution of foods and drinks
worldwide – many are brands that the students have heard of or consume. Then I ask the students how
it is that a food company, which operates in a stable, cash-generative sector, can develop a shortage of
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Following this analysis of the business’ inherent risk, we explore how the Tanzi family kept 51% of
Parmalat’s voting shares after going public in the 1990’s, and how Calisto Tanzi (CEO & Chairman) had
control of the firm and undertook activities beyond the oversight of its Board of Directors. We review
the activities undertaken to see how they were used to fraudulently bolster the company’s finances.
Discussion of ethical issues
1. What conditions appear to have allowed the Parmalat situation to get out of control?
The shortcomings of the system of internal controls included: lack of supervision and control;
2. What specific audit procedures could have uncovered the fraud earlier?
The most important audit procedure in detecting fraud is adequately assessing significant risk
factors. The auditor needs to exercise professional judgment when considering risk factors
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3. What audit steps should Deloitte have taken with regard to the seventeen off-shore subsidiaries
that continued to be audited by Grant Thornton?
Relying on a second (agent) auditor’s work is valid up to a certain extent when business reasons
make a local firm more efficient than the principal auditor. It is also acceptable when the
4. What impact will the Parmalat fraud have on Grant Thornton and on Deloitte & Touche?
In 1999, Deloitte & Touche replaced Grant Thornton as auditors of Parmalat, but Grant
Thornton maintained the audit of 17 Parmalat’s Subsidiaries, including Bonlat. Under the Italian
law, in case of accounting fraud the auditors are able to deny any charges where the company’s
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5. How did the areas of risk in Parmalat’s control environment contribute to the fraud: integrity and
ethics, commitment, audit committee participation, management philosophy, structure, and
authority?
• The company’s management lacked integrity, objectivity and ethics, using company’s funds
to finance personal endeavors of the CEO and his family members, such as being soccer
6. How did the Inherent risk factors in Parmalat’s strategy contribute to the fraud: changes in
operating environment, new people and systems, growth, technology, new business, restructurings,
and foreign operations??
When businesses are growing at fast pace, management is generally concerned with constantly
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7. Should the banks and other creditors be legally responsible for so-called irresponsible lending that
contributes to higher than necessary losses? If so, how can they protect themselves when dealing
with clients whose viability is in doubt?
Banks can provide funds to a client by direct lending or by issuing market securities in their
behalf acting as investment bankers. In both processes, and depending on the size of the loan,
8. Do you think that applying bankruptcy projection models should be a regular tool used by auditors,
creditors, and regulators to assess the reasonability of a company’s financial statements?
Bankruptcy models are analytical models, often based on financial ratios, and used in assessing
the likelihood of a company’s bankruptcy. For obvious reasons, creditors regularly use these
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9. Is independence important in corporate governance? What are the most recent rules on corporate
governance for public firms?
As evidenced in this case, independence and objectivity are fundamental in maintaining
10. Discuss which changes could be made to the Parmalat’s control system and corporate governance
structure to mitigate the risk of accounting and business fraud in future years.
• board of directors with more members
• majority of independent directors
Other Events: April 18, 2006
Van Voris, Bob [Bloomberg News] (April 19, 2006). “Deloitte Italy seeks to sue Parmalat, alleging fraud.”
National Post, FP11.
Deloitte (Italy) asked for permission to sue Parmalat in a federal court in New York.
Useful Articles, Links, and Videos
Gumbel, Peter (November 21, 2004) “How it All Went So Sour.” Time,
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Professional & Fiduciary Duty
2. KPMG Partner Shares Confidential Information with a Friend (Chapter 6, pages
454–455)
What this case has to offer
This case describes why a senior professional, thinking he was helping a friend in a small way, ruined his
own career, damaged his firm’s reputation, and caused his firm to resign from two major audits. It
offers the opportunity to explore/understand the following topics:
1. Insider information and tipping and why they are unethical and illegal.
2. Why seemingly small bits of information can result in very damaging consequences.
Teaching suggestions
To motivate a class discussion about the points above, one of four alternatives can be chosen:
A. Start a discussion about point #1 above, and then expand to discuss the other points.
Discussion of ethical issues
The textbook covers information on inside information, tipping, insider trading, errors in judgment, role
of the professional and professional accountant, and professional codes. Comments for the questions
posed at the end of the case are as follows.
1. Should an accounting firm have to resign as the auditor of a company when the partner in charge of
the audit is convicted of releasing confidential information about that audit client?
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Since the auditor’s role is to provide an objective assessment of corporate reporting in order to
2. How can accounting firms ensure that their partners and staff do not release confidential
information?
Training should be provided on the ethical codes and practices of the firm and the profession,
Useful Articles, Links, and Videos
GrumpyOldAccountants [Anthony Catanach] (April 26, 2013). “KPMG’s Insider Trading Scandal: A
Watershed for the Auditing Profession? [video]”
despite its relatively low monetary consequences, because of the seniority of the partner and
his supervisory authority over—and ability to influence—so many other auditors (50) and over
staff (500).
Pettersson, Edvard (April 24, 2014). “Ex-KPMG Auditor London Gets 14 Months for Insider Trading.”
This article describes the sentence handed down to Scott London, a former senior audit partner
at KPMG, for leaking confidential information to Bryan Shaw who, with it, made more than
million dollars.
Snyder, Riley (June 2, 2014). “Bryan Shaw sentenced to prison in KPMG insider trading case.” Los
This article describes the sentence handed down to Bryan Shaw who profited from insider
trading by KPMG partner Scott London.
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3. Livent – When Maria, When (Chapter 6, pages 455-457)
What this case has to offer
This case illustrates the Professional Accountant’s responsibility to not be associated with misleading or
false information. Maria Messina, CA and Livent’s chief financial officer delayed making public the
irregularities in the company’s accounting policies. This case shows the personal and professional trade–
Teaching suggestions
It would be useful to ask the class what responsibilities of a professional accountant are involved in the
case. This should lead to a discussion of:
• service in the public interest
Discussion of important issues
1. Did Maria blow the whistle at the right time? Why or why not?
The case facts seem to point out that it was too late when she blew the whistle, which caused
significant harm to many stakeholders including shareholders, auditors, herself and others. It is
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2. Was her planned response appropriate? Why or why not?
No, it was not. In a situation like this, waiting is likely to make things worse for both the
3. How would you suggest she should have dealt with the problem?
First, she should have tried to deal with the issue internally by talking to her boss immediately,
or by reporting the issue to the chief internal auditor or compliance offices. As soon as there
4. Should whistle-blowing be encouraged? Why or why not?
Whistleblowing should definitely be encouraged. Appropriate whistleblower programs should
be in place to protect employees who fear negative repercussions from their superiors. In
Additional Question
5. How should Maria have reacted to Drabinski’s abuse?
There should be a company policy covering verbal or physical abuse that states clearly that it is
not appropriate and will result in appropriate discipline. In some jurisdictions such behavior can
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Useful Videos, Films & Links
“Livent co-founders found guilty of fraud, forgery .” (March 5, 2009). CTV News,
Acharya, Madhavi & Tom Yew (March 26, 2009). “Livent looks like our WorldCom.” The Star,