Pertains to the principles of conduct that individuals use in making choices and guiding their...

Pertains to the principles of conduct that individuals use in making choices and guiding their behavior in situations that involve the concepts of right and wrong.

IT Auditing & Assurance, 2e, Hall & Singleton

Business EthicsHow do managers decide on what is right

in conducting business?Once managers have recognized what is

right, how to they achieve it?

The necessity to have an articulate foundation for ethics and a consistent application of the ethical standards.

Role of Management


Create and maintain appropriate ethical atmosphere Limit the opportunity and temptation for unethical

behavior Management needs a methodology for including

lower-level managers and employees in the ethics schema Many times, lower-level managers responsible to uphold

ethical standards Poor ethical standards among employees are a root cause of

employee fraud and abuses

Managers and employees both should be made aware of firm’s code of ethics

What if management is unethical? e.g., Enron

Reported Abuses


Typically junior employees (Wall Street Journal) Half of American workers believe the best way

to get ahead is politics and cheating One-third of a group of 9,175 surveyed had

stolen property and supplies from employers Ethics Resource Center: 1994 study

41% falsified reports 35% committed theft

Ethical Development Most people develop a personal code of ethics from

family, formal education, and personal experience Go through stages of moral evolution [Figure 11-2]

Making Ethical Decisions


Business schools can and should be involved in ethical development of future managers

Business programs can teach students analytical techniques to use in trying to understand and properly handle a firm’s conflicting responsibilities to its employees, shareholders, customers, and the public

Every ethical decision has risks and benefits. Balancing them is the manager’s ethical responsibility:

Ethical Principles Proportionality: Benefits of a decision must outweigh the

risks. Choose least risky option. Justice: Distribute benefits of decision fairly to those who

share risks. Those who do not benefit should not carry any risk

Minimize Risk: Minimize all risks.


A new problem or just a new twist to an old problem?

Although computer programs are a new type of asset, many believe that they should not be considered as different form other forms of

property; i.e., intellectual property is the same as real property and the rights associated with real

property.


The lack of ethical standards* is fundamental to the occurrence of business fraud.

No major aspect of the independent auditor’s role has caused more difficulty for public accounting than the responsibility for detection of fraud during an audit. [article]

This issue has gathered momentum outside the accounting profession to the point where the profession faces a crisis in public confidence in its ability to perform independent attest functions. [SAS 82]

Fraud denotes a false representation of a material fact made by one party to another party with the intent to deceive and induce the other party to

justifiably rely on the fact to his/her detriment, i.e., his/her injury or loss.

Synonyms: White-collar crime, defalcation, embezzlement, irregularities.


A fraudulent act must meet the following 5 conditions:

1. False representation2. Material fact3. Intent4. Justifiable reliance5. Injury or loss


Asset misappropriation fraud1. Stealing something of value – usually cash or inventory (i.e.,

asset theft)2. Converting asset to usable form3. Concealing the crime to avoid detection4. Usually, perpetrator is an employee

Financial fraud1. Does not involve direct theft of assets2. Often objective is to obtain higher stock price (i.e., financial fraud) 3. Typically involves misstating financial data to gain additional

compensation, promotion, or escape penalty for poor performance

4. Often escapes detection until irreparable harm has been done 5. Usually, perpetrator is executive management

Corruption fraud1. Bribery, etc.


Fraudulent financial statements {5%} Corruption {10%}

Bribery Illegal gratuities Conflicts of interest Economic extortion

Asset misappropriation {85%} Charges to expense accounts Lapping Kiting Transaction fraud


Employee Theft

1) Theft of asset2) Conversion of asset (to cash, to

fraudster)3) Concealment of fraud


Special Characteristics:

1. Perpetrated at levels of management above the one where internal controls relate

2. Frequently involves using the financial statements to create false image of corporate financial health

3. If fraud involves misappropriation of assets, it frequently is shrouded in a complex maze of business transactions, and often involves third parties. [e.g., ZZZZ Best fraud]


People engage in fraudulent activities as a result of forces within the individual (their ethical system) and without (from temptation and/or stress from the external environment)1. Situational Pressures2. Opportunity3. Rationalization

A person with a high level of personal ethics and limited pressure and opportunity to commit fraud is most likely to behave honestly [Figure 11-2]

A person with low level of integrity, and moderate to high pressures, and moderate to high opportunity is most likely to commit fraud

Auditors can develop a “red flag” checklist to detect possible fraudulent activity

A questionnaire approach could be used to help auditors uncover motivations for fraud


Do key executives have unusually high personal debt?

Do key executives appear to be living beyond their means?

Do key executives engage in habitual gambling?

Do key executives appear to abuse alcohol or drugs?

Do key executives appear to lack personal codes of ethics?

Do key executives appear to be unstable (e.g., frequent job or residence changes, mental or emotional problems)?

Are economic conditions unfavorable within the company’s industry?

Does the company use several different banks, none of which sees the company’s entire financial picture?

Do key executives have close associations with suppliers?

Do key executives have close associations with members of the Audit Committee or Board?

Is the company experiencing a rapid turnover of key employees, either through quitting or being fired?

Do one or two individuals dominate the company?

Does anyone never take a vacation?


Lack of auditor independence Lack of director independence Questionable executive

compensation schemes Inappropriate accounting practices


PCAOB Auditor independence

List of services considered non-independent

Corporate governance Issuer and management disclosure Fraud and criminal penalties

Forensic Accounting


Fraud auditors Forensic accountants Association of Certified Fraud Examiners

Certified Fraud Examiner certification – http://www.acfe.org

Investigation Evidence for court Litigation CFE – Association of Certified Fraud

Examiners See newsletter sample at ACFE web site


Professor’s Note:I have incorporated material from other sources into this presentation to include ethical issues.


Chapter 15 Forensic and Investigative Accounting 19

Culture Helps Determine Culture Helps Determine Laws and Ethical Laws and Ethical StandardsStandards



Ethical PrinciplesEthical Principles

• Golden rule:Golden rule: Do unto others as you would Do unto others as you would have them do unto youhave them do unto you

• Immanuel Kant’s categorical imperative:Immanuel Kant’s categorical imperative: If an action is not right for everyone to take, If an action is not right for everyone to take, then it is not right for anyonethen it is not right for anyone




• Descartes’ rule of change:Descartes’ rule of change: If an action If an action cannot be taken repeatedly, then it is not right cannot be taken repeatedly, then it is not right to be taken at any timeto be taken at any time

• Utilitarian principle: Utilitarian principle: Put values in rank Put values in rank order and understand consequences of various order and understand consequences of various courses of actioncourses of action




• Risk aversion principle: Risk aversion principle: Take the action Take the action that produces the least harm or incurs the least that produces the least harm or incurs the least costcost

• Ethical “no free lunch” rule: Ethical “no free lunch” rule: All tangible All tangible and intangible objects are owned by creator and intangible objects are owned by creator who wants compensation for the workwho wants compensation for the work



Information Rights: Privacy Information Rights: Privacy and Freedom in the Internet and Freedom in the Internet AgeAge• Privacy:Privacy: Claim of individuals to be left alone, Claim of individuals to be left alone,

free from surveillance or interference from free from surveillance or interference from other individuals, organizations, or the stateother individuals, organizations, or the state

• Fair information practices:Fair information practices: Set of Set of principles governing the collection and use of principles governing the collection and use of information on the basis of U.S. and European information on the basis of U.S. and European privacy lawsprivacy laws



U.S. Federal Privacy LawsU.S. Federal Privacy Laws

General Federal Privacy LawsGeneral Federal Privacy Laws• Freedom of Information Act of 1968 Freedom of Information Act of 1968 • Privacy Act of 1974Privacy Act of 1974• Electronic Communications Privacy Act of 1986Electronic Communications Privacy Act of 1986• Computer Matching and Privacy Protection Act Computer Matching and Privacy Protection Act

of 1988of 1988• Children’s Online Privacy Protection Act of 1998Children’s Online Privacy Protection Act of 1998• Federal Managers Financial Integrity Act of 1982Federal Managers Financial Integrity Act of 1982

Allows public to obtain information regarding the activities of Federal agencies

Restrictions: Records classified national defense or foreign

policy materials Trade secrets and commercial or financial

information obtained from a person and privileged or confidential

Personnel, medical and similar files Records compiled for law enforcement

purposes

extend government restrictions on wire taps from telephone calls to include transmissions of electronic data by computer.

protects wire, oral, and electronic communications while in transit. It sets down requirements for search warrants that are more stringent than in other settings.

protects communication held in electronic storage even during transit.



Communications with Communications with ChildrenChildren Children’s Online Privacy Protection Act of

1998 (COPPA)

◦ Provides restrictions on data collection that must be followed by electronic commerce sites aimed at children

◦ Requires schools that receive federal funds to install filtering software on computers



Sanrio’s Approach to Sanrio’s Approach to COPPA ComplianceCOPPA Compliance



Ethical Issues (continued)Ethical Issues (continued)

Principles for handling customer data◦ Use data collected to provide improved customer

service◦ Do not share customer data with others outside

your company without the customer’s permission ◦ Tell customers what data you are collecting and

what you are doing with it ◦ Give customers the right to have you delete any

of the data you have collected about them



Ethical IssuesEthical Issues

Under what conditions should the Under what conditions should the privacy of others be invaded? privacy of others be invaded?

What legitimaizes intruding into What legitimaizes intruding into others’ lives through unobtrusive others’ lives through unobtrusive surveillance, through market research, surveillance, through market research, or by whatever means? or by whatever means?



Ethical IssuesEthical Issues

Do we have to inform people that we are eavesdropping?

Do we have to inform people that we are using credit history information for employment screening purposes?

Can we review medical records or other personal information with or without consent?



Property Rights: Intellectual Property Rights: Intellectual PropertyProperty

Intellectual property: Intangible creations protected by law

Trade secret: Intellectual work or product belonging to business, not in public domain



Property Rights: Intellectual Property Rights: Intellectual PropertyProperty

Copyright: Statutory grant protecting intellectual property from getting copied for 28 years

Patents: Legal document granting the owner an exclusive monopoly on the ideas behind an invention for 20 years



Web Site Content IssuesWeb Site Content Issues

Fair use of a copyrighted work

◦ Includes copying it for use in criticism, comment, news reporting, teaching, or research

Vicarious copyright infringement

◦ Entity becomes liable if

It is capable of supervising infringing activity

Obtains financial benefit from infringing activity



DefamationDefamation

Defamatory statement◦ Statement that is false and injures the reputation

of another person or company

Product disparagement◦ If a defamatory statement injures the reputation

of a product or service instead of a person

Per se defamation◦ Court deems some types of statements to be so

negative that injury is assumed



Deceptive Trade PracticesDeceptive Trade Practices

Federal Trade Commission◦ Regulates advertising in the United States◦ Publishes regulations and investigates claims of

false advertising◦ Provides policy statements ◦ Policies cover specific areas such as

Bait advertising Consumer lending and leasing Endorsements and testimonials



Federal Statutes Related Federal Statutes Related to Cybercrimesto Cybercrimes

18 U.S.C. 1029 Fraud and Related Activity in Connection with Access Devices

18 U.S.C. 1030 Fraud and Related Activity in Connection with Computers

18 U.S.C. 2701 Unlawful Access to Stored Communications



USA Patriot Act of 2001USA Patriot Act of 2001

The USA Patriot Act has strengthened U.S. cyber laws and expanded cybercrime definitions.

Under the Act, an activity covered by the law is considered a crime if it causes a loss exceeding $5,000, impairment of medical records, harm to a person, or threat to public safety.



USA Patriot Act of 2001USA Patriot Act of 2001

Amendments made by the Act make it easier for an Internet service provider (ISP) to make disclosures about unlawful customer actions without the threat of civil liability to the ISP.

Another revision made by the Act provides that victims of hackers can request law enforcement help in monitoring trespassers on their computer systems.

Controlling the Assault of Non-Solicited Pornography and Marketing Act

Establishes requirements for those who send commercial email, spells out penalties for spammers and companies whose products are advertised in spam if they violate the law, and gives consumers the right to ask emailers to stop spamming them.


It bans false or misleading header information.

It prohibits deceptive subject lines. It requires that your email give recipients an

opt-out method. It requires that commercial email be

identified as an advertisement and include the sender's valid physical postal address.

Report Violations to 1-877-FTC-HELP


Joan works in a large manufacturing plant and handles emergency orders that must be expedited. She frequently places the orders with Goliath Inc. who charges about 5% more than other firms but has a good record for meeting tight deadlines. Joan’s husband is an employee of Goliath.

What if Joan’s husband was the CEO?

Mork works in the mailroom of NeverEver Inc. and opens payment envelopes from customers. About 20% of the payments are in cash. Whenever Mork is short of cash, he writes a check for $100 and cashes it from the customer payments.

Mindy is an 8-5 employee and takes an hour for lunch and two 15 minute breaks. During work hours, she frequently receives and sends personal emails regarding her family. She figures that the time consumes less than ½ hour each day.

Wanda is a clerk at a local supermarket. As a joke, one of the male employees tells her that another male employee (married and 50 years old) is dating Wanda’s daughter who is 25 years of age. The story is not true and Wanda complains to management. Wanda is transferred to another store and is told the male employee will be disciplined. Later, the male employee who told the joke is promoted to management.

IT Auditing & Assurance, 2e, Hall & SingletonIT Auditing & Assurance, 2e, Hall & Singleton

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