Ethics 4-23

  1. Actions needed to deal with the governance credibility crisis.
    Clarification of roles and responsibilities of the BoD, reduction of the conflicts of interest influing directors and auditors, ensure that directors were sufficiently informed, ensure that directors possess adequate financial competence, ensure that financial reports were accurate and transparent, ensure that accounting standards are adequate to protect investors, ensure that the regulation and oversight of auditors serve the public interest.
  2. Perspective of SOX
    Honest and full accountability to shareholders, and public, is of paramount importance.
  3. SOX provisions related to governance
    Clarification of the responsibility of the directors and officers, enhanced conflict of interest provisions, clarification of the role and responsibility of the audit subcommittee.
  4. The audit subcommitee is directly responsible for...
    The appointment, compensation, and oversight of any public accounting firm employed. Must establish procedures to receive and address complaints. Must approve any nonaudit services provided by the auditor.
  5. Who can serve on the audit subcommittee?
    Only independent directors. Must be financially competent and one must be a financial expert.
  6. Auditors must report directly to the audit committee for...
    (As established by SOX)
    Critical accounting policies and practices, alternative treatments of financial information, ramifications of the use of alternative treatments, material written communication between the auditor and management, review of management's assessment of internal controls.
  7. PCAOB must...
    Consist of five members with five year terms; inspect, discipline and write rules governing accounting firms that audit public companies; establish auditing and attestation standards, including quality control and independence standards; maintain a register of foreign firms that audit SEC registrants (foreign accounting firms).
  8. Auditors cannot offer these nonaudit services:
    Bookkeeping and similar services, financial information systems design and implementation, appraisal or valuation services, fairness opinions, actuarial services, internal audit services, management/HR functions, investment advice, legal services.
  9. An audit partner cannot serve as the engagement partner for over how many years?
  10. SOX governance framework will bring positive changes to...
    Improved accountability to public shareholders, improve internal controls and whistle-blower systems, strengthening the role of the audit committee, clarification of roles and responsibilities of the BoD, emphasis on code of conducts, increase penalties for wrongdoing.
  11. WorldCom
    Improper accounting entries, especially line costs. Should have been expensed, but were instead offset by capital transfers. Thus, they were placed on the balance sheet instead of the income statement. Overstated earnings. Should have been easy to spot. Also drew on reserves (cookie jar). Wanted to cover losses and make the company seem profitable. CEO was loaned over 400 million to buy stock, but he used it for personal items. Reporting a loss would have hurt senior bonuses. CEO saw ethics code as a waste of time.
  12. Waste Management Inc.
    Used aggressive accounting policies since the beginning. Multiple changes in who was CEO. Deferred expenses to manipulate earnings. Fraud was perpetrated by senior officers and Anderson. Anderson presented the company with proposed adjusting journal entries (PAJE) to correct errors but management refused. Anderson and WMI signed an agreement, Summary of Action Steps, that identified improper accounting practices. It was an agreement to cover up past frauds with future frauds. By failing to standup to management in the beginning Anderson had to issue unqualified opinions on inaccurate financial statements otherwise they would have to admit to committing fraud.
  13. Sunbeam
    Dunlap was hired as CEO and chairmen order to turn the company around. He employed questionable tactics and hid the fact that he was previously fired for similar questionable tactics. He fired half the employees and raised the stock price. Sunbeam bought other companies using its inflated earnings. Sunbeam improperly booked earnings early. This resulted in even lower earnings in the future. The company couldn't fill legitimate orders due to the lack of employees and chaotic work environments. Used reserves (cookie-jar) to inflate earnings. An internal auditor and a stock analyst noticed the problems. The auditor resigned after no one would listen. Dunlap was able to get away with it because he gave senior management stock options that would result in large losses if the managers left too early. Anderson may have not noticed the problems or deemed them immaterial. Since Dunlap was chairmen of the BoD the auditors may not have been able to go to the board with any problems they found.
Card Set
Ethics 4-23
Ethics Quiz