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

Professionalism & Ethics

End of Chapter Activities

1. Reading review questionsa. 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 WeaknessesUtilitarianism Acceptable outcomes are

clear and easy to understand.

Fails to consider damage / harm that might result from pursuing this philosophy.

Rights & duties Respects and considers the impact decisions will have

Decision makers may disagree on the fundamental rights & duties of

on individuals. individuals.Justice Focuses on outcomes and

results of decisions.Someone must decide what is just / right.

Virtues Sets a high standard for behavior.

Difficult to live up to this 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. TerminologyPlease 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 questions1. C

2. D

3. B

4. A

5. D

6. C

7. C

8. A

9. D

10. A