What could professional accountants have done to prevent the development of the credibility gap and the expectations gap?
> It was early on a Friday morning in London—7:15 a.m. on February 24, 1995, to be exact—that the phone call came for Peter Baring from Peter Norris. Baring’s family had been in banking since 1763. They enjoyed the patronage of the Queen of England and had
> Bankers Trust (BT) was one of the most powerful and profitable banks in the world in the early 1990s. Under the stewardship of chairman Charles Sanford Jr., it had transformed itself from a staid commercial bank into “a highly-tuned man
> Glen Grossmith is an outstanding family man, a frequent coach for his children’s teams, and a dedicated athlete who enjoys individual and team sports. One day, his boss at UBS Securities Canada Inc., Zoltan Horcsok, asked him to do a favor for a col- lea
> On December 20, 2002, New York’s attorney general, Eliot Spitzer, announced a $1.4 billion settlement ending a multi regulator probe of ten brokerages that alleged that “investors were duped into buying over- hyped sto
> Billionaire Raj Rajaratnam was arrested for insider trading on October 15, 2009, and marched in handcuffs from his New York apartment.1 Up to that point, he had enjoyed fame and fortune for founding the $7 billion Galleon Group of hedge funds and its env
> Jérôme Kerviel joined the French bank, Société Générale (SocGen), in 2000 at the age of twenty-three as part of its systems personnel in its back office. In 2005, he became a junior derivatives trader with an annual limit of €20 million, which is just un
> The discount airline Jetsgo Corporation began operations in June 2002. Within two and a half years, it grew to become Canada’s third-largest airline, moving approximately 17,000 passengers per day on its fleet of twenty-nine airplanes, fifteen of which w
> According to the Royal Ahold company profile, Ahold is a global family of local food retail and foodservice operators that operate under their own brand names. Our operations are located primarily in the United States and Europe. Our retail business cons
> In October 2009, PepsiCo Inc. launched, apologized, and then pulled an iPhone application called “AMP Up Before You Score,” designed to promote its Amp Energy drink. The drink’s target market is males between the ages of eighteen and twenty-four. Release
> Siemens AG is a 160-year-old German engineering and electronics giant. It is one of Europe’s largest conglomerates, with profits in 2007 of €3.9 billion on revenue of €72.4 billion, up €6 billion from its 2006 revenue. It has over 475,000 employees and o
> On March 19, 2003, the SEC filed accounting fraud charges in the Northern District of Alabama against HealthSouth Corporation and its CEO, Richard Scrushy. Scrushy was also charged with knowingly miscertifying the accuracy and completeness of the company
> Dennis Kozlowski was a dominant, larger-than-life CEO of Tyco International, Ltd, a multi-billion-dollar company whose shares are still traded on the New York Stock Exchange (Symbol: TYC). His stature was huge, and his appetite for excess knew no bounds.
> On June 20, 2005, “John Rigas, the 80-year old founder of Adelphia Communications Corp., was … sentenced to 15 years in prison and his son Timothy, the ex-finance chief, got 20 years for looting the com- pany and lying about its finances.”1 These were th
> By the late 1990s, Nortel Networks Corporation, headquartered in Brampton, Ontario, Canada, was one of the giants of the telecommunications industry. Seventy- five percent of North America’s Internet traffic was carried by Nortel equipment,1 which was ma
> Satyam Computer Services Ltd was founded in 1987 by B. Ramalinga Raju. By 2009, it was India’s fourth-largest information technology company with 53,000 employees, operating in sixty-six countries. It provided a variety of services, including computer sy
> Employee stock options allow company executives to buy shares of their company at a specified price during a specified time period. They are given to executives as a form of noncash compensation. The option or “strike price” is normally equal to the mark
> Pierre Garvey, the CEO of Revel Information Technology, sat back in his chair and looked at his assistants. He frowned. “My son has been diagnosed with MLD,” he said. They all looked at him with shock. “Its proper name is metachromatic leuko dystrophy, a
> Walt Pavlo joined MCI in the spring of 1992. At that time, MCI was a growth company in the booming long-distance tele- communications industry that had 15% of the long-distance market, with revenues of $11 billion. In the 1990s, the major telecommunicati
> On November 17, 2005, Conrad Black and three other executives1 of Hollinger Inter- national, Inc., were charged with eleven counts of fraud with regard to payments allegedly disguised as “noncompete fees” or, in one case, a “management agreement breakup
> Tiger Woods, once probably the world’s greatest golfer, lost his number one ranking in October 2010, the same year that his marriage to Elin Nordegren blew up when she chased him out of the house and broke the windows of his vehicle with a 9 iron. His po
> In January 2006, the chair of Hewlett-Packard (HP), Patricia Dunn, hired a team of independent electronic-security experts to determine the source of leaked confidential details regarding HP’s long-term strategy. In September 2006, the press revealed tha
> Kelly Brown had been a member of the Board of Governors of the Wolfson General Hospital (WGH) for two years and had been asked to consider becoming the vice chair of the board. She had been a nurse before leaving to raise her family and now enjoyed parti
> The discussion between Don Chambers, the CEO, and Ron Smith, the CFO, was get- ting heated. Sales and margins were below expectations, and the stock market analysts had been behaving like sharks when other companies’ published quarterly or annual financi
> On September 30, 2004, Merck voluntarily withdrew its rheumatoid arthritis drug (Vioxx) from the market due to severe adverse effects observed in many of its users (Exhibit 1). As a result, Merck’s share price fell $11.48 (27%) in one d
> Johnson & Johnson (J & J) enjoyed a halo effect for many decades after their iconic precautionary recall of Tylenol capsules in 1982, which was greatly facilitated by the famous Johnson & Johnson Credo1 that stipulated patient well-being to be para- moun
> One of the world’s largest oil spills began on April 20, 2010, in BP’s Deepwater Hori- zon/Macondo well in the Gulf of Mexico. Although the world did not take significant notice until the next day, an estimated 62,000
> The NFL has known for some time that serious brain damage could be caused by the head trauma that is part of a normal football game. The sudden serious jarring of a football player’s head in normal tackling and blocking has been suspected for decades of
> The Kardell paper mill was established at the turn of the century on the Cherokee River in southeastern Ontario by the Kardell family. By 1985, the Kardell Paper Co. had outgrown its original mill and had encompassed several facilities in different locat
> In order to meet strong competition from Volkswagen as well as other foreign domes- tic subcompacts, Lee Iacocca, then president of Ford Motor Co., decided to introduce a new vehicle by 1970, to be known as the Pinto. The overall objective was to produce
> Antismoking advocates cheered in the summer of 1997 when the U.S. tobacco industry agreed to pay out more than U.S. $368.5 billion to settle lawsuits brought by forty states seeking compensation for cigarette-related Medicaid costs. Mississippi Attorney
> In June 2012, Jerry Sandusky was convicted of sexually abusing ten boys while he was an assistant football coach at Pennsylvani State University. His abuse of children went back almost fourteen years and was known by his superior, Joe Paterno, the head f
> In 1984, when he was eighteen years old, Cesar Correia murdered his father, killing him with a baseball bat. Cesar then dumped the body in the Assiniboine River. The body was eventually found, and Cesar confessed to the crime. He pleaded guilty to mansla
> Alex McAdams, the recently retired CEO of Athletic Shoes, was honored to be asked to join the Board of Consolidated Mines International Inc. Alex continues to sit on the Board of Athletic Shoes, as well as the Board of Pharma-Advantage, another publicly
> Adverse selection occurs when one party has an information advantage over the other party. In the case of insurance, people taking out insurance know more about their health and lifestyle than the insurance company. Therefore, in order to reduce informat
> Throughout 2009, the world was plagued with the H1N1 swine flu epidemic. The H1N1 influenza virus, which began in Mexico, spread rapidly. In June, the World Health Organization (WHO) declared it to be a global pandemic. Those who caught the virus suffere
> On October 1, 2012, IKEA apologized for removing women from the photographs in the IKEA catalogs that were shipped to Saudi Arabia. IKEA is a Swedish company that was founded in 1943. It is now the world’s largest furniture retailer with stores in over f
> Eric Hebborn (1934–1996) was an English painter and art forger. Hebborn attended the Royal Academy of Arts and then the British School at Rome, two of the most prestigious fine arts schools at the time. Underappreciated as an artist, he turned his hand t
> In the airline industry, passenger load capacity is the proportion of seats filled on each flight. The objective is to have all air- planes at full-load capacity on all flights. In October 2000, Jeffrey Lafond, a former Air Canada employee, joined WestJe
> On September 5, 2007, Steve Jobs, the CEO of Apple Inc., announced that the spectacularly successful iPhone would be reduced in price by $200 from $599, its introductory price of roughly two months earlier.1 Needless to say, he received hundreds of email
> Deutsche Bank (DB) is the largest bank in Germany and world’s sixth-largest investment bank.1 Unfortunately, the bank suffered from lackluster leadership, a poor organizational culture, and a complicated governance structure that result
> In 2006, Mercedes-Benz introduced Blue- TEC, an advanced system to trap and neutralize harmful emissions and particulates that allowed Mercedes to market “clean diesel” cars. VW and Audi made agreements to share the technology to enable all three compani
> In January 2002, the Boston Globe began a series of articles reporting that Fr. John Geoghan had been transferred from one parish to another in the Archdiocese of Boston, even though senior church officials knew that he was a pedophile. There was outrage
> On a fateful day in 2001, a GM engineer realized during preproduction testing of the Saturn Ion that there was a defect that caused the small car’s engine to stall with- out warning.1 This switch was approved in 2002 by an engineer, Raymond DiGeorgio, wh
> Should executives and directors be sent to jail for the acts of their corporation's employees?
> Why didn’t some corporations protect women employees from sexual abuse before 2017–2019?
> How can corporations ensure that their employees behave ethically?
> Why is it important for the clients of professional accountants to be ethical?
> Why might ethical corporate behavior lead to higher profitability?
> On any given day, a bank may have either a surplus or a deficiency of cash. When this occurs, banks tend to lend to and borrow from other banks at a negotiated rate of interest. These interbank loans could be as short as one day and as long as several mo
> Why are we more concerned now than our parents were about fair treatment of employees?
> Why have concerns over pollution become so important for management and directors?
> Should organizations that have a risk-taking culture, such as the one developed by Stan O’Neil at Merrill Lynch, enjoy the gains and suffer the losses, without recourse to government bailouts?
> Should the CEOs who refused to have their firms invest in mortgage-backed securities in the early years because the risks were too great receive bonuses in the latter years because their firms did not incur any mortgage-backed security losses? How would
> Should CEOs who made large bonuses by having their firms invest in mortgage-backed securities in the early years have to repay those bonuses in the later years when the firm records losses on those same securities?
> The government bailout of the financial community included taking an equity interest in publicly traded companies such as American International Group (AIG). Is it right for the government to become an investor in publicly traded companies?
> How much should the exiting CEOs of Fannie Mae and Freddie Mac have received when they were replaced in September 2008?
> Identify and explain five examples where executives or directors faced moral hazards and did not deal with them ethically.
> How could ethical considerations improve unbridled self-interest in ethical decision making?
> Wal-Mart has a brand image that triggers strong reactions in North America, particularly from people whose businesses have been damaged by the company’s over- powering competition with low prices and vast selection and by those who value the small-busine
> How could increased regulation improve the exercise of unbridled self-interest in decision making?
> What were the three most important ethical failures that contributed to the subprime lending fiasco?
> Does the Dodd-Frank Act go far enough, or are some important issues not addressed?
> Should members and executives in investment firms be forced to be members of a profession with entrance exams and with adherence to a professional code such as is the case for professional accountants or lawyers?
> Given that the marketplace for securities is global, and that the risks involved can affect people worldwide, should there be a global regulatory regime to protect investors? If so, should it be based on the regulations of one country? Should enforcement
> The global economic crisis was caused by the meltdown in the U.S. housing market. Should the U.S. government bear some of the responsibility of bailing out the economies of all countries that were harmed by this crisis?
> Are the criticisms that mark-to-market (M2M) accounting rules contributed to the economic crisis valid?
> How much and in which ways did unbridled self-interest contribute to the subprime lending crisis?
> What would you list as the five most important ethical guidelines for dealing with North American employees?
> Do professional accountants have the expertise to audit corporate social performance reports?
> Bernie Madoff perpetrated the world’s largest Ponzi scheme,1 in which investors were initially estimated to have lost up to $65 billion. Essentially, investors were promised—and some received—returns
> Why should a corporation make use of a comprehensive framework for considering, managing and reporting corporate social performance? How should they do so?
> Descriptive commentary about corporate social performance is sometimes included in annual reports. Is this indicative of good performance, or is it just window dressing? How can the credibility of such commentary be enhanced?
> How could a corporation utilize stakeholder analysis to formulate strategies?
> Corporate reporting to stakeholders other than shareholders has exploded. Why is this? Can stakeholders really make good use of all the information now available?
> How will the U.S. external auditor’s mindset change in order to discharge the duties contemplated by SAS 99 on finding fraud?
> If a corporation’s governance process does not involve ethics risk management, what unfortunate consequences might befall a corporation?
> Why should ethical decision making be incorporated into crisis management?
> If a company is to be sentenced for paying bribes 10 years ago, should the company be banned from all government contracts for 10 years, just made to pay a fine, or both? Consider the impacts on all stakeholder groups, including current and past sharehol
> What would you advise that corporations do to recognize the new worldwide reach of antibribery enforcement related to the FCPA and the U.K. Bribery Act?
> How would you advise your company’s personnel to act with regard to expectations of guanxi in China?
> This case presents, with additional information, the WorldCom saga included in this chapter. Questions specific to WorldCom activities are located at the end of the case. WorldCom Lights the Fire WorldCom, Inc., the second-largest U.S. telecommunications
> The #MeToo Movement has finally succeeded in getting women’s allegations of sexual abuse to be taken seriously by management and boards of directors. Why did it take so long for this tipping point to be reached?
> What should a North American company do in a foreign country where women are regarded as secondary to men and are not allowed to negotiate contracts or undertake senior corporate positions?
> Should a North American corporation operating abroad respect each foreign culture encountered, or insist that all employees and agents follow only one corporate culture?
> Is trust really important—can’t employees work effectively for someone they are afraid of or at least where there is some “creative tension”?
> In what ways do ethics risk and opportunity management, as described in this chapter, go beyond the scope of traditional risk management?
> Why is maintaining the confidentiality of client or employer matters essential to the effectiveness of the audit or accountant relationship?
> Which would you chose as the key idea for ethical behavior in the accounting profession: “Protect the public interest” or “Protect the credibility of the profession”? Why?
> When should an accountant place his or her duty to the public ahead of his or her duty to a client or employer?
> Why are most of the ethical decisions accountants face complex rather than straightforward?
> What is meant by the term "fiduciary relationship"?
> Once the largest professional services firm in the world and arguably the most respected, Arthur Andersen LLP (AA) has disappeared. The Big 5 accounting firms are now the Big 4. Why did this happen? How did it happen? What are the lessons to be learned?
> Answer the seven questions in the opening section of this chapter.
> Why do codes of conduct or existing jurisprudence not provide sufficient guidance for accountants in ethical matters?
> Many professional accountants know of questionable transactions but fail to speak out against them. Can this lack of moral courage be corrected? How?
> 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 Iris
> 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 t
> 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?
> What should an auditor do if he or she believes that the ethical culture of a client is unsatisfactory?
> How can a professional accountant develop moral courage?
