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Ethical Obligations and Decision Making in Accounting Text and Cases 3rd edition Steven Mintz, Roselyn Morris - Solutions
In the aftermath of the collapse of financial institutions like Lehman Brothers and audit deficiencies of investment banking firms, a great deal of attention has been devoted to requiring mandatory auditor rotation. Some critics of the audit profession are concerned about a breakdown in external
1. From an accounting principles perspective, why was it wrong to capitalize the advertising costs? What do you think was the motivation for AOL’s original treatment of these costs?2. Using Kohlberg’s Six Stages of Moral Development, at which stage was AOL when it made the decision to
1. Assume that both Popperson and Snow are CPAs. Do you think Snow violated his confidentiality obligation under the AICPA Code by informing Popperson about the faulty equipment at CSM? Why or why not. As a licensed CPA firm, do you think Hodgins and Gelman has any ethical responsibilities in this
1. Briefly discuss the rules for revenue recognition in accounting and how they pertain to this case. Does the proposed handling of the $12 million violate those rules? Be specific.2. Assume Carl Land is a CPA and Helen Strom holds the Certificate in Management Accounting (CMA). What ethical
1. Assume Jennie Lin is a CPA. Evaluate her actions with respect to the rules of conduct of the AICPA. 2. Jennie believes that her actions were proper because taking the money from the church and giving it to the homeless served a greater good. Do you agree with her position from an ethical
1. Evaluate Joe’s actions and motives using ethical reasoning and with reference to the AICPA Code of Professional Conduct.2. Evaluate Joe’s actions from a cognitive development perspective.3. What would you do if you were in Barbara’s position? Use ethical reasoning to support your action
1. Do you think it is ethically appropriately for Wanda David to provide tax services to Wiz, an audit client and customer of her employer, Gee, LLC, at the same time she works for the audit firm and is part of the audit engagement team on the Wiz audit? Why or why not?2. Has David violated any her
1. If you were Yimei, what ethical concerns would exist for you upon discovering the three accounts? What is the first thing you would do upon discovering the three accounts?2. Assume that FO provides invoices to justify the amounts in each account. You review the documentation and notice that
1. What is the nature of the contractual allowance account? Can you equate it to other allowance accounts? Explain the rules under GAAP to account for such allowances.2. Personal morality and ethics make up the collective morality and ethics of a corporation. Given our discussion about the ethics
1. Who are the stakeholders in this case and what are their interests?2. What are Kolb’s ethical obligations with respect to the Medicare fraud and her reporting it within Valley View under the AICPA Code of Professional Conduct?3. What would you do at this point if you were Sue Kolb and why?
1. In commenting on the findings in the consultant’s report, the then-chief accountant of the SEC, Lynn E. Turner, said, “This report is a sobering reminder that accounting professionals need to renew their commitment to the fundamental principle of auditor independence.” Why is it so
1. What are the dangers of accepting contingent fees from audit clients for performing non-audit services? Assume in such situations the auditor can, in fact, make independent audit decisions regardless of the contingent fee arrangements. Would independence be impaired in such situations?2. How did
What is the purpose of audit “risk assessment”? What are its objectives, and why is it important in assessing the likelihood that fraud may occur?
Distinguish between an auditor’s responsibilities to detect and report errors, illegal acts, and fraud. What role does materiality have in determining the proper reporting and disclosure of such events?
AU 240 points to three conditions that enable fraud to occur. Briefly describe each condition. How does one’s propensity to act ethically as described by Rest’s model of morality influence each of the three elements of the fraud triangle?
Explain the content of each section of the audit report. Evaluate the importance of each section with respect to the users of financial reports.
Give one example each of when an auditor might render an unmodified opinion and include an emphasis-of-matter paragraph and other-matter paragraph. What is the value of such paragraphs in the audit report?
The following statement expresses the conclusion of XYZ auditors with respect to the company’s investment in ABC. Assume that all amounts are material. What kind of audit opinion should be rendered given this statement? Explain the reasoning behind your answer.
Rationalization for fraud can fall under two categories: “no harm” and “no responsibility.” Assume an employee is directed by management to reduce recorded expenses at year-end by insignificant amounts individually, but which are material in total. How might the employee justify her actions
Some criticize the accounting profession for using expressions in the audit report that seem to build in deniability should the client commit a fraudulent act. What expressions enable the CPA to build a defense should the audit wind up in the courtroom? How does your analysis relate to the opening
The audit report on General Motors for 2008 issued by Deloitte & Touche included the following statement: “The Corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise
Do you think the concept of materiality is incompatible with ethical behavior? Why or why not?
How do materiality judgments affect risk assessment in an audit of financial statements?
According to GAAS, the auditor must evaluate the control deficiencies that he has become aware of to determine whether those deficiencies, individually or in combination, are significant deficiencies or material weaknesses. What is the purpose of the auditor’s evaluation of internal controls in
In 2005, the IMA reported the results of a survey of business, academic, and regulatory leaders conducted by the Center for Corporate Change that found the corporation’s culture to be the most important factor influencing the attitudes and behavior of executives. The results indicate that 88
Kinetics, Inc., included the following footnote in its December 31, 2013, financial statements:We corrected the misstatement of capitalized advertising costs recorded in 2012 by adjusting operating expenses for 2013, and crediting the asset account. The result of this correction is to reduce income
What do you think is meant by the term ethical auditing with respect to principles and rules of professional conduct in the AICPA Code?
Mr. Arty works for Smile Accounting Firm as a senior accountant. Currently he is doing a review of rental property compliance testing completed by the staff accountants. He is testing rental receipts and expenses of the property owned by the client. Arty realizes that the staff accountants tested
What are the auditor’s responsibilities to communicate information to the audit committee under AICPA and PCAOB standards? If the auditor discovers that the audit committee routinely ignores such communications especially when they are critical of management’s use of GAAP in the financial
In Europe, the audit reports use the expression “true and fair view” to characterize the results of the audit. Do you think there is a meaningful difference between that language and the “present fairly” statement made in U.S. audit reports? As a user of the financial statements in each
"Accounting firms and their personnel must continually evaluate their clients' accounting and related disclosures, putting themselves in investors' shoes.” This statement was made on February 8, 2012, by Claudius B. Modesti, Director of the PCAOB Division of Enforcement and Investigations, in
Audit morality includes moral sensitivity, moral judgment, moral motivation, and moral character. Explain how audit morality plays a key role in determining best audit practice that influences audit performance.
1. Analyze each revenue recognition technique identified in the audit committee investigation and explain whether each technique violates revenue recognition rules in accounting. Evaluate the practices followed by CA from an ethical perspective.2. CA executives were not accused of reporting
1. Do you believe that auditors should be held liable for failing to discover fraud in situations such as ZZZZ Best, where top management goes to great lengths to fool the auditors? Answer this question with respect to the ethical and professional responsibilities of audit professionals when
1. What is the role of professional skepticism in auditing financial statements? Do you think the auditors were skeptical enough in evaluating the operations of Imperial Valley?2. a. Assume the auditors decide to support management’s position and reduce the amount of loan write-offs. The decision
1. From an ethical perspective, why do auditors evaluate business risk before deciding whether to accept a new client?2. Integrity is an essential element in the relationship between client management and the auditor. Evaluate the issue of integrity from the perspective of possibly taking on Jost
1. Why did the round-trip transactions engaged in by Krispy Kreme and its franchisees violate revenue recognition rules? How should they have been recorded under GAAP?2. Evaluate the corporate governance at Krispy Kreme during its financial statement fraud including management’s stewardship
Assume that Francey Gordon goes to Karen Gross and Frank Johnson to discuss the matter. Gordon tells Gross and Johnson that just because the freight forwarder indicates the merchandise is picked up on December 31, that doesn’t justify reporting the revenue until the foods are on its way to
1. What is the role of an external auditor? Is it to simply examine the client’s financial statements or more – to be an investigator in conducting and completing the audit?2. Evaluate the actions taken by Sandy Cole and Joan Franks in this case. Were their actions in accordance with ethical
1. Explain the rules for accounting for impairment of loans under Statement of Financial Accounting Standards (FAS) No. 114, Accounting by Creditors for Impairment of a Loan. Did FCB apply these rules properly?2. Evaluate the audit work of Howard & Stacey with respect to PCAOB audit standards
1. An eight-month investigation by OFHEO concluded that slack standards at Fannie Mae created a corporate culture “that emphasized stable earnings at the expense of accurate financial disclosures.” What is wrong with having stable earnings over time? Answer this question with respect to
1. Explain how Ahold used promotional allowances to manipulate earnings. Refer to the fraud triangle described in this chapter and analyze the incentives, pressures, and opportunities to commit fraud at Ahold.2. Utilize the COSO Integrated Framework and discussion of risk assessment in the chapter
1. What is the responsibility of management and the auditor with respect to the internal controls of a client?2. Groupon disclosed a “material weakness” in its internal controls saying that it had failed to set aside enough money to cover customer refunds. Do you believe the company engaged in
Distinguish between common-law liability and statutory liability for auditors. What is the basis for the difference in liability?
Explain the difference between the ethical responsibilities of auditors and auditor legal obligations.
Is there a conceptual difference between an error and negligence from a reasonable care perspective? Give examples of each of your response.
Distinguish between the legal concepts of actually foreseen third-party users and reasonably foreseeable third-party users. How does each concept establish a basis for an auditor’s legal liability to third parties?
Describe what the law requires with respect to the legal ruling in Credit Alliance v. Arthur Andersen & Co. Do you think the ruling establishes a fair basis for an auditor’s legal liability to third parties?
Explain the legal basis for a cause of action against an auditor. What are the defenses available to the auditor to rebut such charges? How does adherence to the ethical standards of the accounting profession relate to these defenses?
A subsequent event is one that occurs after the date of the financial statements (i.e., December 31, 2013) but prior to the auditor having dated (or possibly issued) the audit report (i.e., March 15, 2014). One type of subsequent event is where additional evidence becomes available before the
What are the legal requirements for a third party to sue an auditor under Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934? How do these requirements relate to the Hochfelder decision?
Valley View Manufacturing Inc., sought a $500,000 loan from First National Bank. National insisted that audited financial statements be submitted before it would extend credit. Valley View agreed to this and also agreed to pay the audit fee. An audit was performed by an independent CPA who
Nixon and Co., CPAs, issued an unmodified opinion on the 2013 financial statements of Madison Corp. These financial statements were included in Madison’s annual report and Form 10-K filed with the SEC. Nixon did not detect material misstatements in the financial statements as a result of
Distinguish between legal and illegal insider trading. Evaluate the ethics of the practice.
The legal concept of in pari delicto holds that in a “case of equal or mutual fault [in a financial fraud] the position of the defending party [auditor] is the stronger one.” The predicate for this defense is imputation: holding the corporation responsible for the acts of its officers. The
According to a 2012 study by Fortune magazine, 86.5 percent of Fortune 100 companies have adopted claw back provisions that allow them to recover cash bonuses or stock from errant executives. Apparently, such provisions now have become a widely accepted corporate governance practice. What
Some auditors claim that increased exposure under Section 404 of the SOX creates a litigation environment that is unfairly risky for auditors. Do you think that the inability of auditors to detect a financial statement misstatement due to internal control fraud in a timely manner should expose
Under Dodd-Frank, whistleblowers can obtain a monetary award if a violation of securities laws involves potential wrongdoing by an accountant’s auditing firm, including – but not limited to – failing to comply with the requirements of section 10A of the Exchange Act of 1934. As a future
The following quotation was in the court ruling in the case of the Public Employees’ Retirement Association of Colorado v. Deloitte & Touche, LLP:It is not an accountant’s fault if its client actively conspires with others in order to deprive the accountant of accurate information about the
On December 31, 2009, the SEC sued Alameda, California–based telecommunications company UTStarcom, Inc., with violations of the Foreign Corrupt Practices Act for authorizing millions of dollars in unlawful payments by its wholly owned Chinese subsidiary to foreign government officials in Asia.
Given the discussion of the FSGFO in this chapter, comment on the statement that workplaces based on the FSGFO are better places to work.
In her article about possible changes to the legal liability of auditors due to the modification of GAAS and the audit report as a result of “The Clarity Project,” Nancy Reimer points out that although the goal of the “clarified standards” is to make GAAS easier to read, understand and
Has the accounting profession created a situation in which the auditors’ ethical behavior is impaired by their professional obligations? How does the profession’s view of such obligations relate to how courts tend to view the legal liability of auditors?
1. The mission of a global group called Transparency International is to stop corruption and promote transparency, accountability and integrity at all levels and across all sectors of society. The organization's "Core Values" are: transparency, accountability, integrity, solidarity, courage,
1. The FCPA distinguishes between so-called facilitating payments and more serious activities. Do you think such a distinction and the related penalties for violations under the Act make sense from an ethical perspective? Use the utilitarian analysis of harms and benefits of facilitating payments
1. Evaluate the ethics of trading on client securities by Klein, given that he was an employee benefits specialist on the audit.2. Did Klein’s actions violate any rules of conduct in the AICPA Code? Why or why not?3. Do you think Klein would have any legal liability for his actions? Explain.
1. Was it ethical for Marissa to own stock in the client, given she had no involvement with the audit engagement?2. Assume that Marissa calls her best friend, who also owns stock in the audit client and works in the tax department of the firm. Marissa tells her friend about the expected stock price
1. The auditors (P&T) claimed to have no duty to Anjoorian as a shareholder of FCC. The Rhode Island Supreme Court acknowledged that the duty of accounting professionals to third parties is an open question in the state, but it did identify at least three competing views: the foreseeability test,
1. Do you believe Deloitte & Touche breached its fiduciary duty to Vertical Pharmaceuticals in this case? Why or why not?2. Do you believe Deloitte was guilty of malpractice as alleged by Vertical? Use the discussion in this chapter to answer this question.3. Do you think it was ethical for
1. Identify the stakeholders in this case and the ethical obligations of independent members of the board of directors and audit committee to these parties.2. What are the legal liabilities of board members and members of the audit committee? Analyze the facts of the case and comment whether they
1. Do you think L&H’s actions with respect to Locate Plus and its alleged relationship with Omni Data illustrates a case of moral blindness? Explain with respect to the ethics of actions by Locate Plus and its effect on audit decisions by L&H.2. A critical element of the due care requirement is
1. What would the bank have to do prove to successfully bring a law suit against Kay & Lee for ordinary negligence? Use legal principles to support your answer.2. Changing the facts of the case, assume the client hired Kay & Lee to audit the financial statements, explaining that the purpose
1. Describe the nature of the relationship between Szekelyi and Reznor. Did a privity relationship exist between the two? Why or why not?2. What were Szekelyi’s ethical obligations to Reznor given the nature of the services provided? Which of the ethics standards in the AICPA Code should have
1. Why do you think it is important for a reinsurance transaction to transfer risk in order for a company to obtain the benefits of reinsurance accounting? Discuss the accounting and legal issues behind such a requirement.2. Assume the external auditors of Zurich Re and Converium knew about the
In Arthur Levitt’s speech that was referred to in the opening quote he also said: “.I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting. Managing may be giving way to manipulation; Integrity may be losing out to illusion.”
Relevance and faithful representation are the qualitative characteristics of useful information under SFAC 8. Evaluate these characteristics from an ethical perspective. That is, how does ethical reasoning enter into making determinations about the relevance and faithful representation of financial
Evaluate earnings management from a utilitarian perspective. Can earnings management be an ethical practice? Discuss why or why not.
Evaluate the following statements from an ethical perspective:“Earnings management in a narrow sense is the behavior of management to play with the discretionary accrual component to determine high or low earnings.”“Earnings are potentially managed, because financial accounting standards
Comment on the statement that materiality is in the eye of the beholder. How does this statement relate to the discussion in the chapter of how to gauge materiality in assessing financial statement restatements? Is materiality inconsistent with the notion of representational faithfulness?
Needles talks about the use of a continuum ranging from questionable or highly conservative to fraud to assess the amount to be recorded from for an estimated expense. Discuss his concept of a continuum and the choices within a range from an ethical perspective. That is, how might a decision about
Explain how the quality of corporate governance, risk management, and compliance systems is critical in controlling financial restatement risk within organizations.
In 2010 LinkedIn reported trade payable obligations totaling $10.8 million in other accrued expenses within accrued liabilities instead of accounts payable. In 2011, note 2 in the 10-K financial statements described the use of accrued liabilities instead of accounts payable as a classification.
Comment on the statement that what a company’s income statement reveals is interesting but what it conceals is vital.
Maines and Wahlen state in their research paper on the reliability of accounting information: “Accrual estimates require judgment and discretion, which some firms under certain incentive conditions will exploit to report non-neutral accruals estimates within GAAP. Accounting standards can enhance
Safety-Kleen is a North American company that offers environmental products and services. The company issued a major financial restatement in 2001. In 2000, the company’s board of directors initiated an investigation of possible accounting fraud within the company. The next year, Safety-Kleen
Revenue recognition for multiple-element arrangements as occurred in the Xerox case discussed in this chapter calls for determining the stand-alone selling price for each of the deliverables and using it to separate out the revenue amounts. Why do you think it is important to separate out the
Tinsel town Construction just received a $2 billion contract to construct a modern football stadium in the City of Industry located in southern California for a new National Football League (NFL) team called the Los Angeles Devils of Industry. The company estimates it will cost $1.5 billion to
Explain how the use of available-for-sale securities can lead to managed earnings.
In the Enron case the company eventually turned to “back-door” guaranteeing of the Chewco, one of its SPE, to satisfy equity investors. Assume that one guarantee was for a $16 million loan. The loan agreement required that Enron stock should not fall below $40 per share. If the share price
On August 9, 2005, a special committee comprised of two independent directors of Krisp Kreme (the €œSpecial Committee€) presented a report of its investigation into an accounting fraud to the board of directors.The following numbers were included in the Krispy Kreme Special
Explain whether you believe fraudulent reporting is positively correlated with each of the following conditions: (1) more financial pressure imposed by a supervisor of a firm; (2) higher percentage of complex transactions of a firm; (3) more questionable integrity of a firm’s managers; and (4)
Schilit recognizes that cash flow shenanigans also exist when a company takes actions to send their desirable cash inflows to the most important section (Operating) and all of the unwanted cash out flows to the other sections (Investing and Financing). Given that regard less of the classification
In the study of earnings quality by Dichev et al., CFOs stated that “current earnings are considered to be high quality if they serve as a good guide to the long-run profits of the firm.” Discuss how and why current earnings may not be a good barometer of the long-term profits of the firm.
Explain what is meant by the following two statements and why they may be true:Where management does not try to manipulate earnings, there is a positive effect on earnings quality. The absence of earnings management does not, however, guarantee high earnings quality.
1. Auditors are required to assess fraud risks as part of their ethical and professional responsibilities. What characteristics of Nortel might have caused it to be identified as a high-risk audit? Use the fraud triangle in answering this question. 2. In the Ontario Superior Court ruling, Justice
1. Describe the rules in accounting for revenue recognition in general and relate them to the two transactions mentioned in the case. Be sure to include proper citations from the pronouncements of the Financial Accounting Standards Board (FASB) and other relevant material. Do you believe the
1. What do you think was the motivation for Cubbies Cable in taking the position to expense all cable costs during the year ended September 20, 2013? Would you characterize the position as an attempt to manage earnings? Why or why not?2. Who are the stakeholders in this situation? Identify the
1. Review the definitions of earnings management by Schipper, Healy and Whalen, Dechow and Skinner, and McKee that are discussed in this chapter. How would you characterize the proposed accrual for unpaid bonuses and severance payments from an earnings management perspective?2. Place yourself in
1. How would you characterize Dell’s accounting for the exclusivity payments with respect to the financial shenanigans discussed in this chapter?2. Joseph E. Abbott, the vice president and controller of West Pharmaceuticals Service, Inc., in Lionville, Pennsylvania, once said: “Investors should
Use the integrated ethical decision-making process described in Chapter 2 to evaluate the ethical and professional issues in the case. What would you do if you were in Vinny Barbieri’s position?
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