Ethical standards – rights and wrongs that are not universally agreed upon Ethical standards – rights and wrongs that are not universally agreed upon
Ethics – principles of conduct that individuals use in making choices and guiding Ethics – principles of conduct that individuals use in making choices and guiding their behavior in situations that involve
their behavior in situations that involve the concepts of the concepts of right and wrongright and wrong Business Ethics – involves nding the answers:
Business Ethics – involves nding the answers: !
! How do How do managers managers decide odecide on what n what is righis right in ct in conducting onducting their btheir business"usiness" #!
#! $nce mana$nce managers have gers have recognrecogni%ed whai%ed what is rt is right& how ight& how do they do they achieve itachieve it"" ' Ethics are needed when con(icts arise – the need to choose
' Ethics are needed when con(icts arise – the need to choose ' Con(icts may
' Con(icts may be b)w employees& be b)w employees& management and)or stakeholdmanagement and)or stakeholdersers Ethical *ssues in Business
Ethical *ssues in Business !! EE++uuiittyy # #!! ,,iigghhttss 3 3!! HHoonneessttyy -!
-! E.E.ererciscise of core of corporporate pate poweowerr /aking Ethical 0ecisions
/aking Ethical 0ecisions
1roportionality – benet from a decision must outweigh the risks and& also& there 1roportionality – benet from a decision must outweigh the risks and& also& there must be no alternative decision that provides the same or greater benet with less must be no alternative decision that provides the same or greater benet with less risk
risk !
! 2ustice – 2ustice – benets shbenets should be dould be distributed istributed fairly to fairly to those who those who share share the risksthe risks those who do not benet should not carry the burden of risk
those who do not benet should not carry the burden of risk #!
#! /inimi%e /inimi%e ,isk – ,isk – decision decision should should be implemebe implemented so nted so as to as to minimi%e minimi%e all ofall of the risks and avoid any unnecessary risks
the risks and avoid any unnecessary risks Computer Ethics – the
Computer Ethics – the analysis of nature and social impact of analysis of nature and social impact of computer technologycomputer technology and the corresponding formulation and 4ustication of policies for the ethical use of and the corresponding formulation and 4ustication of policies for the ethical use of technology5this includes concerns about software as well as hardware and
technology5this includes concerns about software as well as hardware and concerns about networks connecting computer
concerns about networks connecting computers as s as well as computer themselveswell as computer themselves ' Concerns the social impact
' Concerns the social impact of computer technologyof computer technology 6hree levels
6hree levels of computer ethof computer ethics:ics: !
! 1op – 1op – e.posure.posure to store to stories and ries and reports foueports found in thnd in the popular e popular mediamedia regar
regarding good or ding good or bad ramications of computer technologybad ramications of computer technology #!
#! 1ara 1ara – involves – involves taking a rtaking a real intereal interest in cest in computer ethicomputer ethics case ans case andd ac+uiring some level of skill and knowledge in the eld
ac+uiring some level of skill and knowledge in the eld 3!
3! 6heoreti6heoretical – is cal – is of interof interest of multest of multidisciplinaidisciplinary resry researchers earchers who applwho apply they the theories of philosophy& sociology& and psychology to computer science theories of philosophy& sociology& and psychology to computer science with the goal of bringing some new understanding to the eld
with the goal of bringing some new understanding to the eld Computer Ethics *ssue:
! 1rivacy – raises the issue of ownership of personal information #! 7ecurity 89ccuracy and Condentiality – an attempt to avoid such
undesirable events as a loss of condentiality or data integrity
3! $wnership of 1roperty – intellectual property ;;; software what can be owned"
-! E+uity in 9ccess
<! Environmental *ssues
=! 9rticial *ntelligence – replacements for e.perts what of faulty programming"
>! ?nemployment and 0isplacement – because of incapability to adapt to changes caused by moderni%ation
@! /isuse of Computers
7$A and Ethical *ssues – 7ection -= – Code of Ethics for 7enior inancial $Dcers ; ,e+uires public companies to disclose whether they have adopted a code of
ethics that applies to their CE$& C$& C$$ and the likes if not& state why ; *t may disclose in several ways
o *ncluded as an e.hibit to its annual report o 9s a posting on its website
o By agreeing to provide copies of the code upon re+uest
; 9 companies code of ethics should apply to all e+ually
• Con(icts of interest – code of ethics should outline procedures for dealing
with actual or apparent con(icts of interest b)w personal and professional relationships con(icts are dealt with and arent prohibited
• ull and fair disclosure – ob4ective: to ensure that future disclosure are
candid& open& truthful and void of deception
• Fegal compliance – code of ethics should re+uire employees to follow
applicable governmental laws& rules and regulations
• *nternal reporting of code violation – code of ethics must provide a
mechanism to permit prompt internal reporting of ethics violations
• 9ccountability – eGective ethics program must take appropriate action when
code violations occur
raud – false representation of a material fact by one part to another with the intent to deceive and induce the party to 4ustiably rely on the fact to his or her detriment
Conditions to be met:
! alse representation – false statement or nondisclosure #! /aterial fact
3! *ntent
-! 2ustiable reliance <! *n4ury or loss
9!k!a! white;collar crime& defalcation& embe%%lement and irregularities
9uditors encounter fraud at two levels:
! Employee fraud – designed to directly convert cash or other assets to the employees personal benet
a! 7tealing something of value b! Converting asset to usable form c! Concealing crime to avoid detection #! /anagement fraud – performance fraud
a! raud is perpetrated at levels of management above the one to w)c internal control structures generally relate
b! raud fre+uently involves using the 7 to create an illusion that an entity is healthier and more prosperous than it is
c! *f fraud involves misappropriation of assets& fre+uently shrouded in a ma%e of comple. business transactions& often involving
related third parties raud 6riangle
! 7ituational pressure #! $pportunity
3! Ethics
• ?se the red;(ag checklist to provide insights of these factors
inancial Fosses from raud – there could be direct and indirect losses ; ot all fraud are detected
; $f that detected& not all is reported
; *n many fraud cases& incomplete information is gathered
; *nformation is not properly distributed to management or law enforcement authorities
; $ften& no civil or criminal action is taken up against perpetrator of fraud 1erpetrators of raud ;;; who has more opportunity
1osition – those at top they have greater access company funds and assets
Iender – men they more high corporate positions
9ge – older employees they tend to have higher;ranking positions
Education – with more education they tend to be on top
Collusion – collusion b)w those with critical positions they create opportunities that other%ise would not e.ist
raud 7chemes
! raudulent 7tatements
; 9ssociated w) management fraud
; 6he statement itself should bring a direct or indirect nancial benet to the perpetrator
; ?nderlying problems
a! Fack of auditor independence b! Fack of director independence
c! Juestionable e.ecutive compensation scheme – like abuse of stock; based compensation
; 7$A
o 0eal w) problems related to capital markets& corporate governance
and auditing profession
o Changed how public companies do business and how accounting
profession performs its attest function
o 1C9$B – set auditing& +ualifying control and ethics standards
inspect registered accounting rms conduct investigations take disciplinary actions
o 9uditors *ndependence
o Corporate Iovernance and ,esponsibility
9udit committee must be independent
9udit committee must hire and oversee e.ternal auditors
1ublic companies are prohibited from making loans to e.ecutive oDcers and directors
9ttorneys are re+uired to report evidence of material
violation of securities laws or breaches of duciary duty of the CE$& C$ or the 1C9$B
o *ssuer and /anagement 0isclosure
1ublic companies must report all oG;balance;sheet transactions
9nnual reports led with 7EC should include a statement by management asserting that it is responsible for creating and maintaining ade+uate internal controls and asserting to the eGectiveness of the controls
$Dcers must certify that the companys accounts fairly present the rms nancial condition and result of
operations
Knowingly ling a false certication is a criminal oGense
o raud and Criminal 1enalties
#! Corruption
; *nvolves an e.ecutive& manager or employee in collusion with an outsider ; Bribery – giving& oGering& soliciting or receiving things of value to
in(uence an oDcial in the performance of his or her lawful duties ; *llegal gratuities – giving& receiving& oGering or soliciting something of
value because of an oDcial act that has been taken
; Con(icts of interest – occurs when employee acts on behalf of a third party during the discharge of his or her duties or has self;interest in the activity being performed
; Economic e.tortion – use of force to obtain something of value 3! 9sset /isappropriation
; /ost common
; 9ssets are either directly or indirectly diverted to the perpetrators benet
; 7kimming – stealing cash from an organi%ation before it is recorded on the organi%ations books and records e.ample: mail room fraud
; Cash larceny – involves schemes in w)cash receipts are stolen from an organi%ation after they have been recorded in the organi%ations books and records e.ample: lapping
; Billing schemes or vendor fraud – perpetrated by employees who causes their employer to issue a payment to a false supplier or vendor by
submitting invoices from ctitious goods or services& in(ated invoices or invoices for personal purchases
o 7hell company – no real transaction takes place o 1ass through fraud – transaction actually takes place
o 1ay;and;return – pay vendor twice then intercept refund of e.cess
; Check tampering
; 1ayroll fraud – disbursement of fraudulent paychecks to e.istent or none.istent employees
; E.pense reimbursement fraud – employee makes a claim for reimbursement of ctitious or in(ated business e.penses ; 6hefts of cash
; on;cash misappropriation ; Computer fraud
*nternal Control Concepts and 6echni+ues
; *nternal control system comprises policies& practices and procedures employed by the organi%ation to achieve its ob4ectives
o $b4ectives:
7afeguard assets of the rm
Ensure accuracy and reliability of accounting records and information
1romote eDciency in the rms operations
/easure compliance with managements prescribed policies and procedures
; /odifying assumptions –these - are inherent in the control ob4ectives
o /anagement responsibility ; the establishment and maintenance
of a system of internal control is the responsibility of management
o ,easonable assurance ; the cost of achieving the ob4ectives of
internal control should not outweigh its benets
o /ethods of data processing ; the techni+ues of achieving the
ob4ectives will vary with diGerent types of technology
o Fimitations:
1ossibility of honest errors
Circumvention via collusion
/anagement override
Changing conditions;;especially in companies with high growth
; E.posures and risks
o E.posure – absence or weakness of a control may e.pose rm to
one or more of the G! risks:
6heft of assets
Corruption of information or the *7
0isruption of the *7
; 1reventive controls – passive techni+ue designed to reduce fre+uency of occurrence of undesirable event
; 0etective controls – designed to identify and e.pose undesirable events that elude preventive controls
; Corrective controls – actions taken to reverse the eGects of errors detected
; 797 >@ – current authoritative document for specifying internal control ob4ectives and techni+ues based on C$7$ for auditors
; Committee of 7ponsoring $rgani%ations of the 6readway Commission 8C$7$ – a management tool
797 >@)C$7$
0escribes the relationship between the rms :
internal control structure&
auditors assessment of risk& and
the planning of audit procedures
How do these three interrelate?
' 6he weaker the internal control structure& the higher the assessed level of risk the higher the risk& the more auditor procedures applied in the audit
797 >@)C$7$ Components
! Control environment – foundation of the other four components – tone on top #! ,isk assessment – done to identify& analy%e and manage risks relative to
nancial reporting
3! *nformation and communication
-! /onitoring – process by w)c +uality of internal control design and operation can be assessed
<! Control activities – policies and procedures used to ensure that appropriate actions are taken to deal with the organi%ations identied risks
a! *6 Controls – relate specically to computer environment
i! 9pplication controls – ensure the integrity of specic systems ii! Ieneral controls – pertain to entity;wide concerns
b! 1hysical Controls – relates primarily to human activities employed in accounting systems must be purely manual
i! 6ransaction authori%ation – purpose is to ensure that all material transactions are processed by the *7 and are valid and in
accordance with managements ob4ective
9uthori%ation may be general or specic
o Ieneral 9uthority – granted to operations personnel to
perform day;to;day operations programmed procedure rules are specied in advance and no additional
o 7pecic 9uthority – case;by;case decisions
ii! 7egregation of duties – ob4ectives:
! 6ransaction authori%ation vs! transaction processing
#! ,esponsibility for the custody of asset vs! record;keeping responsibility
3! $rgani%ational structure must only let fraud with collusion of # or more employees with incompatible responsibilities be successful
iii! 7upervision – often called compensating control underlying assumption: rm employs competent and trustworthy personnel
supervisory eDciency
iv! 9ccounting records – consists of source documents& 4ournals and records captures the economic essence of transactions and provide an audit trail of economic events
v! 9ccess controls – to ensure that only authori%ed personnel have access to rms assets
vi! *ndependent verication – are independent checks of the accounting system to identify errors and misrepresentations diGers from supervision because it takes place after the fact& by an individual who is not directly involved with the transaction or task being veried 8supervision takes place while the activity is being performed by a supervisory w) direct responsibility for the task through this management can assess the performance of individuals& the integrity of the transaction processing system and the correctness of data contained in accounting records
