Flashcards in Ch 2 Ethics and Governance Scandals Deck (102)
What is the typical pattern associated with scandals and resulting reforms?
- Scandal outrages public
- Public tolerance diminishes
- Credibility of corporations is eroded
- Lawmakers, regulators, directors, and professional bodies respond to restore confidence
What was at the heart of the Enron scandal?
Failure of BOD
What was at the heart of Arthur Andersen's downfall?
An organizational culture gone awry
What was at the heart of the WorldCom scandal?
Power in hands of one man
What was at the heart of the subprime mortgage meltdown?
Greed without due diligence
What were three key reforms in response to all the scandals?
- Circular 230 (new professional standards on tax preparers and advisors)
- Dodd Frank Act
In 1933, why was the Glass-Steagall Act passed?
To control bank speculation and protect investor deposits
In 2010, what was the passage of the Dodd Frank Act in response to?
Response to subprime lending problems
In 1999, what did the Gramm-Leach-Bliley Act repeal?
What was the stock market crash/great depression a result of?
- Widespread speculation
- Inadequate financial reporting
- Inadequate banking controls
As a result of the spectacular stock market crash in 1929, the government implemented the Securities Act of 1933, the Securities Exchange Act of 1934, as well as which of the following acts:
a) Glass Steagall Act
b) Investment Advisers Act
c) Gramm-Leach-Bliley Act
d) All of the above
e) Two of the above
e) Two of the above (Glass Steagall and Investment Advisers Act)
What does the Securities Act of 1933 require from companies raising money from the public?
- Register with SeC
- Follow SEC regulations reissuing securities, providing information to investors
- Requires audit certification by independent accountant
What did the Securities Exchange Act of 1934 create?
Created regulatory framework for trading of stocks and bonds of registered companies
What did the Glass-Steagall Act of 1933 separate?
Separates investment banks from commercial banks to prevent bank failures (i.e. to prevent commercial banks from engaging in speculative practices)
What did the Investment Advisers Act of 1940 create?
Created framework for registration and regulation of investment advisors
Between 1970 and 1990, what movements arose?
- Consumerism (e.g. Ralph Nader)
- Socially responsible investing
- Regulation concerning child labor, fair wages, fair trade, sweatshops
- Corporate stakeholders
Name a scandal related to accounting fraud.
- Aurora Foods
What did AA do in 1954 that started to shift its organizational culture?
Expanded from providing accounting and audit services to providing consulting services (to the very same firms it was auditing)
True or false.
By 1984, AA's consulting services revenue was greater than audit service revenue.
What was the prime motivation behind the decisions of AA's audit partners on the Enron, WorldCom, WM, and Sunbeam audits?
- Revenue generation and client retention
- Partners more interested in serving their own interest than serving the public
During the 1980s, how did the culture of integrity at AA change?
- Revenue generation became key to promotion
- Focus was on providing non-audit services to management
- Pressure to reduce audit costs increased
- Audit partners allowed to override rulings of quality control partners
Did the AA partner in charge challenge Enron's accounting policies?
True or false.
AA was providing both audit and consulting services to Enron, and was deriving more revenue from providing management services.
Why should an auditor make decisions in the public interest rather than in the interest of management or current shareholders?
Auditors responsibility is to the public
Why didn't the AA partners responsible for quality control stop the flawed decisions of the audit partners?
- Tried via memos
- But firm's governance structure had earlier determined that audit partner in charge could override quality control partner's decisions
In March of 2002, what did the SEC announce?
It was investigating AA for audit deficiencies w/r/t Enron audit
What did AA's lawyer seem to encourage the Enron audit team to do?
Should all of AA have suffered for the actions or inactions of under 100 people?
- Seems unfair to many innocent partners and staff
- Society was not well-served by loss of one of the Big 5
- But disappearance of AA sent a clear message
Which of AA personnel should have been prosecuted?
- Larger fine and imprisonment for AA decision makers like audit partners
- Plus a very large fine and sanctions for continuing firm