ETHICS IN ACCOUNTING & THE

BUSINESS WORLD
Mr. Valanzano
What are ethics?
 Ethics – _____________________________________

 Ethics deals with __________________ in relation t0

what is __________________________

 Business Ethics – the ___________ and ___________

that reflect a company’s ________________ such as
_____________________________________

 A business’ ethics are usually seen through:

 How ________________________________________
 How the company attends to _________________________
__________________________________________________
__________________________________________________
Differences Between _____ & ____
 A business may use law as a guide, but must
consider ethical principles and standards as well.

 Law and ethics both define ___________________

_________________
 Law describes a minimum _________________________
__________________________
 Ethical concepts have more _______________________
and are ___________________ than written rules of law

 Example:
 A business may be well within the law to _____________
certain products to teenagers, but it may not be ______
_____________________________
Statements of Company Values
 People often learn their ethical standards and values by __________
______________________, not necessarily by what they say.

 ____________________ – a formal policy of ____________________

_______________ that describes the ethical behaviors that a
company expects from its ___________________________________

 The following topics are often addressed within a code of ethics:

 __________________________________
 Product quality and testing
 __________________________________
 Employee relations
 __________________________________
 Expense reports
 ___________________________
 Political contributions
 __________________________________
 International business
 ____________________________________
 Technology
 _________________________________
Ethics ________ & __________
 After a code of ethics is created, it is important to communicate
that policy properly.

 _______________ of the written code, along with _____________

_______________ helps employees understand the importance
of these policies and gives them ___________________________
__________________________________.

 _____________________ – the employee directly responsible for

creating _______________________________________________
_______________________________________________________

 Once a hearing has been held and issues have been resolved, a
company’s code of ethics might contain penalties for violations
such as:
 _______________________________
 _______________________________
 _______________________________
 _______________________________
 _______________________________
What is the accountant’s role?
 Accountants play a major role in the __________
_______________________________ of business.
In these roles, many ethical dilemmas can arise.

 An accountant’s ___________________________
________________________ directly impact how
the company is viewed, and how the profession,
in turn, is assessed.

 Ethically trained accountants should focus on the

following:
 __________________________________
 __________________________________
 __________________________________
 __________________________________
Who benefits from ethical behavior?
 ________________________
 Increased ______________________________________________________
 Having _________________________________________________ will help you
achieve goals and find a successful career
 Able to enjoy benefits in a society where ________________________________
___________________________________
 _________________ of decisions improves as you work for a ________________
_______________________________________

 _______________________
 A recent study indicated that companies who made commitments to ethics
codes provided _____________________________________________________
than those companies who did not.
 Good corporate behavior leads to ______________________________________

 ________________________
 As businesses act in ethical ways, _____________________________
 In the area of ethical financial reporting, the public can be confident in the data
provided to make informed investment decisions, which would lead to greater
capital funding being available for growth and productivity, yielding strong and
healthy economies.
Quick Review
 Answer the following questions on your handout:
 1) Which of the following is NOT something an
ethically trained accountant focuses on?
A) Optimizing public interest B) Respecting rights
C) Harming stockholders D) Adhering to ethics

 2) The employee directly responsible for creating

business conduct programs, evaluating performance,
and enforcing standards of conduct is called a(n)
____________________.

 3) True or False: Political contributions and

environmental actions are topics that are often
addressed within a code of ethics.
 Key Principles of Ethics in
the Accounting Profession
 ______________________
 Accountants need to choose what is right and just over what is wrong
 Ask yourself, “________________________________________________”
 ______________________________________________________ violates
the accounting principle of integrity
 _________________________________________________________ also
violates integrity

 _________________________
 Accountants are required to be __________________________________
_________________________________, and should not be influenced by
____________________________________________
 Every year publicly traded corporations must submit financial
statements to the _____________________________________________
 These statements are audited by _________________________________
 These CPAs ___________________________ the companies they audit
 Many different users of financial information _______________________
______________________________ when making decisions
 Key Principles of Ethics in

the Accounting
_____________________________
Profession
 The CPA performing an audit must not have a _______________________________
_______________________________________
 _________________________________________________________ would interfere
with the independence required of an auditor
 CPA and non-CPA employees in a public accounting firm ______________________
_______________________________________________

 ______________________________
 Refers to the ____________________________________ needed to complete a task
 Accountants are expected to maintain an appropriate level of competence through
___________________________________ and to continually improve the ________
___________________________________
 Services should be rendered ______________________________________________
________________________________________________

 ________________________________
 Any information acquired through the course of work must be _________________
________________________________ without the appropriate legal or professional
responsibility to do so and should not be used for personal gain
 Accountants learn about every financial aspect of a company from ______________
____________________________________________
Who writes the codes of ethics?
 Several accounting organizations provide guidelines to
assist in ethical decision making:
 ____________________________________
 ______________________________________
 Member voluntarily accept standards of professional behavior that
are ______________________________ than those required by law

 ______________________________________________
 Leading professional organization devoted exclusively to
_________________________________________________________
 Management accountants usually have ________________________
 The IMA helps accounts develop _____________________________
through _________________________________________________

 ________________________________________________
 The IIA believes that now, more than ever, _____________________
_________________________________________________________
_____________________________________
 The IIA’s code of ethics is necessary and appropriate because of the
_____________________________________________________
 Quick Review
 Answer the following questions on your handout:
 1) What are the 5 key principles of the accounting profession?

 2) True or False: It doesn’t matter if a CPA owns stock in the

company they are auditing.

 3) What is the name of the government agency that publicly trader

corporations must submit financial statements to?
A) FCC B) DEA C) SEC D) FDA

 4) If an accountant’s manager gives instructions to record the

inventory at its original costs when it is obvious that the inventory’s
value has decreased, what should the accountant do?

 5) If an auditor finds questionable accounting practices within a

client’s financial reporting, yet knows the client is a major source of
revenue for their firm, what action should be taken?
 Famous Business Ethics Cases:
Bernie Madoff
 Ponzi Scheme - is a fraudulent investment operation that pays returns to its investors from their
own money or the money paid by subsequent investors, rather than from any actual profit earned
by the individual or organization running the operation.
 The Ponzi scheme usually entices new investors by offering higher returns than other
investments, in the form of short-term returns that are either abnormally high or unusually
consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new
investors to keep the scheme going.
 The system is destined to collapse because the earnings, if any, are less than the payments to
investors. Usually, the scheme is interrupted by legal authorities before it collapses because a
Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more
investors become involved, the likelihood of the scheme coming to the attention of authorities
increases.
 The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920.
 According to the SEC, two back office workers who worked for Madoff created false trading
reports based on the returns that Madoff ordered for each customer. For example, once Madoff
determined a customer's return, one of the back office workers would enter a false trade from a
previous date and then enter a false closing trade in the amount of the required profit.
 Prosecutors allege that a computer program specially designed to backdate trades and
manipulate account statements was used. In some cases returns were allegedly determined
before the account was even opened.
 Madoff admitted during his March 2009 guilty plea that the essence of his scheme was to deposit
client money into a Chase account, rather than invest it and generate steady returns as clients
had believed. When clients wanted their money he used the money in the Chase account that
belonged to them or other clients to pay the requested funds.
 Famous Business Ethics Cases:

Enron
In 2001, after a series of revelations involving irregular accounting procedures bordering on fraud perpetrated throughout the 1990s
involving Enron and its accounting firm Arthur Andersen, Enron suffered the largest Chapter 11 bankruptcy in history at that time.
 As the scandal unraveled, Enron shares dropped from over US $90.00 in the summer of 2000 to just pennies. Enron had been
considered a blue chip stock, so this was an unprecedented event in the financial world. Enron's plunge occurred after the revelation
that much of its profits and revenue were the result of deals with special purpose entities (limited partnerships which it controlled).
This meant that many of Enron's debts and the losses that it suffered were not reported in its financial statements.
 Enron filed for bankruptcy on December 2, 2001. In addition, the scandal caused the dissolution of Arthur Andersen, which at the
time was one of the world's top accounting firms. The firm was found guilty of obstruction of justice in 2002 for destroying
documents related to the Enron audit. Since the SEC is not allowed to accept audits from convicted felons, Andersen was forced to
stop auditing public companies. Although the conviction was thrown out in 2005 by the Supreme Court, the damage to the
Andersen name has prevented it from returning as a viable business even on a limited scale.
 Enron created offshore entities (units which may be used for planning and avoidance of taxes, raising the profitability of a business).
This provided ownership and management with full freedom of currency movement and the anonymity that allowed the company
to hide losses. These entities made Enron look more profitable than it actually was, and created a dangerous spiral, in which each
quarter, corporate officers would have to perform more and more financial deception to create the illusion of billions in profits while
the company was actually losing money.This practice drove up their stock price to new levels, at which point the executives began
to work on insider information and trade millions of dollars worth of Enron stock. The executives and insiders at Enron knew about
the offshore accounts that were hiding losses for the company. However, the investors knew nothing of this. CFO Andrew Fastow
led the team which created the off-books companies, and manipulated the deals to provide himself, his family, and his friends with
hundreds of millions of dollars in guaranteed revenue, at the expense of the corporation for which he worked and its stockholders.
 In 1999, Enron launched EnronOnline, an Internet-based trading operation, which was used by virtually every energy company in
the US. Enron president and COO Jeffrey Skilling began advocating a novel idea: the company didn't really need any "assets.“ By
pushing the company's aggressive investment strategy, he helped make Enron the biggest wholesaler of gas and electricity, trading
over $27 billion per quarter. The firm's figures, however, had to be accepted at face value. Under Skilling, Enron adopted mark to
market accounting, in which anticipated future profits from any deal were tabulated as if real today. Thus, Enron could record gains
from what over time might turn out to be losses, as the company's fiscal health became secondary to manipulating its stock price on
Wall Street during the Tech boom.But when a company's success is measured by agreeable financial statements emerging from a
black box, a term Skilling himself admitted, actual balance sheets prove inconvenient.
 Enron's unscrupulous actions were often gambles to keep the deception going and so push up the stock price. An advancing number
meant a continued infusion of investor capital on which debt-ridden Enron in large part subsisted. Under pressure to maintain the
illusion, Skilling verbally attacked Wall Street Analyst Richard Grubman,[who questioned Enron's unusual accounting practice during
a recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet
along with its earnings statements, Skilling replied "Well, thank you very much, we appreciate that . . . a**hole." Though the
comment was met with dismay and astonishment by press and public, it became an inside joke among many Enron employees,
mocking Grubman for his perceived meddling rather than Skilling's lack of tact. When asked during his trial, Skilling wholeheartedly
admitted that industrial dominance and abuse was a global problem: "Oh yes, yes sure, it is.