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Chapter 3 -- End of Chapter Activities Answer Key

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					Accounting Information Systems (AIS) – End of Chapter Activities –
Chapter #3

Professionalism & Ethics

End of Chapter Activities

   1. Reading review questions
         a. List and discuss ten characteristics of a professional and / or professional
            behavior.      Where possible, include a specific example of each
            characteristic from your own experience as a student. Students may fall
            back on Bell’s list of seven items discussed in the chapter as a start:
            communicates effectively; thinks rationally, logically and coherently;
            appropriately uses technical knowledge; integrates knowledge from many
            disciplines; exhibits ethical professional behavior; recognizes the
            influence of political, social, economic, legal and regulatory forces;
            actively seeks additional knowledge.            They might also consider
            McDonald’s four criteria: specialized knowledge base, complex skills,
            autonomy of practice and adherence to a code of ethical behavior.
            However, the best responses to this question will demonstrate students’
            ability to think beyond those lists. Other items might include (but are
            certainly not limited to): contributes to the community, demonstrates good
            research skills, uses information technology appropriately and actively
            participates in professional organizations.
          b. Define “ethics.” Explain why ethics is so important in the accounting profession.
             In an accounting context, ethics refers to the behavioral codes and norms that
             govern decision making and communication within and outside the profession.
             Ethics are particularly important in accounting because of the trust the public
             places in accountants, and because accounting is not a black-and-white discipline.
          c. Compare and contrast the ethical codes of the AICPA, IMA and ACFE.
             Similarities in the codes include their focus on the behavior of accountants, their
             inclusion in accounting professional exams and their broad applicability in a
             variety of organizational contexts. Differences include the specific behaviors and
             situations addressed, as well as the organizational structure of each code.
          d. What basic schools of thought exist regarding ethical behavior? What are the
             strengths and weaknesses of each one? The four schools of thought with some
             strengths and weaknesses are summarized in the table below:


                              Strengths                           Weaknesses
     Utilitarianism  Acceptable outcomes are          Fails to consider damage / harm
                     clear and easy to                that might result from pursuing
                     understand.                      this philosophy.
     Rights & duties Respects and considers the       Decision makers may disagree on
                    impact decisions will have      the fundamental rights & duties of
                    on individuals.                 individuals.
  Justice           Focuses on outcomes and         Someone must decide what is just
                    results of decisions.           / right.
  Virtues           Sets a high standard for        Difficult to live up to this
                    behavior.                       philosophy in the face of
                                                    conflicting priorities.

       e. Explain the basic facts of fraud schemes associated with Ponzi, Adelphia and
          Enron.

                   Ponzi initiated the type of fraud that now bears his name. He solicited
                    investors for a project, but failed to pay them a return from the project
                    itself. Instead, he used money from new investors to pay off old
                    investors. Note that Ponzi schemes can also be described as ―pyramid‖
                    schemes, but that not all pyramid schemes are Ponzi schemes.

                   In Adelphia Cable, the Rigas family used their personal positions and
                    organizational power to misuse corporate assets. They also engaged in
                    ―shady‖ accounting practices to bolster their firm’s performance in
                    financial markets.

                   Enron was the largest bankruptcy in US history at the time of its
                    declaration. Company officers, such as Lay and Skilling, ignored
                    traditional accounting rules related to revenue recognition; in other
                    cases, however, they followed the letter of accounting standards while
                    ignoring their spirit (such as in their use of special purpose entities).

       f. In a manner specified by your instructor, respond to the questions for this
          chapter’s opening vignette.

                   Under what circumstances, if any, is it ethical for a company to
                    use aggressive accounting policies? Students will undoubtedly
                    want a clear-cut answer to this question; however, I don’t believe
                    such an answer exists. Each situation must be evaluated based
                    on decision makers’ ethical frame of reference and any
                    applicable code(s) of conduct.
                   What should Jim, Fred and the CFO do in this case? Fred should do
                    nothing; accounting is outside his area of expertise. Jim should raise his
                    concerns with the CFO—privately first, then with others if he and the
                    CFO cannot agree on this issue. The CFO should seek others’ input
                    before making a decision one way or the other.

7. Ethics cases (Stocks, K.D. and S. Albrecht. ―Ethical Dilemmas‖ in The Internal
Auditor. June 1993, pp. 24 – 25)
a. Upon graduating from Ethics University five years ago, you accepted a job with
Peat & Price CPAs. After three years with that firm, you joined MiniCare Health
Company as an audit senior and are now an audit manager with that company. Not
long after being promoted to audit manager, you noticed that the executives of the
company were doing things that you didn't think were appropriate. The company
over billed Medicare on several occasions, and several members of senior
management were abusing their positions by taking company perks that were against
the company's code of conduct. You have talked to your superior, the financial vice
president. He has, in essence, told you to mind your own business. He told you that
auditors are to report on controls and assist management, not question it. You are
currently making $100,000 a year, far more than you could earn in another company
at this stage in your career. Which elements of the IMA Ethical Code are the
company’s executives violating? Use the Langenderfer and Rockness eight-step
framework to decide how you would respond to this situation. The executives are
violating competence (perform professional duties in accordance with relevant laws,
regulations, and technical standards) and integrity (abstain from engaging in or
supporting any activity that might discredit the profession). The decision process
using the Langenderfer & Rockness model might look like this:


            1 The company has over billed Medicare &
              violated its own ethical code.
            2 The ethics issue centers on misuse of
              company funds; stakeholders include
              management, the government (taxpayers) and
              stockholders.
            3 Executives should not overfill Medicare, nor
              ignore their own ethical code.
            4 The audit manager can ignore the situation,
              investigate & report it or ask to be part of it.
            5 The best course of action is to investigate &
              report.
            6 Consequences of ignoring: the situation will
              continue and possibly escalate.
              Consequences of investigating & reporting:
              job loss. Consequences of asking to be part
              of it: breaking the law.
            7 The audit manager could discuss the situation
              with the audit committee of the Board or with
              an AICPA / IMA ethics advisor.
            8 The appropriate decision is to investigate and
              report.

b. You are an auditor for International Pharmaceutical Company (IPC), a company
that has invested over $200 million in developing a new drug. For tax purposes, the
related research and development expenses were written off as deductible expenses
           on IPC's U.S. corporate tax returns. When the drug was patented, your company set
           up a Puerto Rican subsidiary to manufacture the drug. The company then transferred
           the patent to the subsidiary and arranged to purchase the drug from the subsidiary at
           a high price. IPC justified the transfer price as reasonable because of the high value
           of the patent, which is now owned by the subsidiary company. You are concerned
           because you think the price being charged by the subsidiary is excessive and is being
           used to inflate costs and minimize taxes paid to the U.S. government. You know that
           tax rates are considerably less in Puerto Rico than in the U.S. Is the company
           violating any elements of the AICPA Code of Professional Conduct? If so, which?
           Use the Langenderfer and Rockness eight-step framework to decide how you would
           respond to this situation. I’m not confident the company is violating the AICPA
           Code of Professional Conduct in this case. Puerto Rico is a US territory, and
           taxpayers have a responsibility to minimize (legally) the amount of taxes paid to the
           government. Since I don’t perceive an ethics issue here, I don’t think the
           Langenderfer & Rockness framework is especially applicable. I’d be interested in
           getting alternative perspectives on this case.

10. Terminology
       Please match each item on the left with the most appropriate item on the right.
               1. F

               2. J

               3. C

               4. I

               5. G

               6. H

               7. D

               8. A

               9. B

               10. E

11. Multiple choice questions
               1. C

               2. D

               3. B

               4. A
5. D

6. C

7. C

8. A

9. D

10. A

				
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