Discussion Questions on Ethics, Fraud, and Internal Control.

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Discussion Questions

1. Distinguish between ethical issues and legal issues.

2. Some argue against corporate involvement in socially responsible behavior because the costs incurred by such behavior place the organization at a disadvantage in a competitive market. Discuss the merits and flaws of this argument.

3. Although top management’s attitude toward ethics sets the tone for business practice, sometimes

it is the role of lower-level managers to uphold a firm’s ethical standards. John, an operations-level manager, discovers that the company is illegally dumping toxic materials and is in violation of environmental regulations. John’s immediate super- visor is involved in the dumping. What action should John take?

4. When a company has a strong internal control structure, stockholders can expect the elimination of fraud. Comment on the soundness of this statement.

5. Distinguish between employee fraud and manage- ment fraud.

6. The estimates of losses annually resulting from computer fraud vary widely. Why do you think obtaining a good estimate of this figure is difficult?

7. How has the Sarbanes-Oxley Act had a significant impact on corporate governance?

8. Discuss the concept of exposure and explain why firms may tolerate some exposure.

9. If detective controls signal error flags, why shouldn’t these types of controls automatically make a correction in the identified error? Why are corrective controls necessary?

10. Discuss the nonaccounting services that external auditors are no longer permitted to render to audit clients.

11. Discuss whether a firm with fewer employees than there are incompatible tasks should rely more heavily on general authority than specific authority.

12. An organization’s internal audit department is usually considered an effective control mechanism for evaluating the organization’s internal control structure. The Birch Company’s internal auditing function reports directly to the controller. Comment on the effectiveness of this organizational structure.

13. According to SAS 78/COSO, the proper segregation of functions is an effective internal control procedure. Comment on the exposure (if any) caused by combining the tasks of paycheck preparation and distribution to employees.

14. Explain the five conditions necessary for an act to be considered fraudulent.

15. Distinguish between exposure and risk.

16. Explain the characteristics of management fraud.

17. The text identifies a number of personal traits of managers and other employees that might help uncover fraudulent activity. Discuss three.

18. Give two examples of employee fraud, and explain how the thefts might occur.

19. Discuss the fraud schemes of bribery, illegal gratu- ities, and economic extortion.

20. Distinguish between skimming and cash larceny.

21. Distinguish between a shell company fraud and pass through fraud.

22. Why are the computer ethics issues of privacy, security, and property ownership of interest to accountants?

23. A profile of fraud perpetrators prepared by the Association of Certified Fraud Examiners revealed that adult males with advanced degrees commit a disproportionate amount of fraud. Explain these findings.

24. Explain why collusion between employees and management in the commission of a fraud is difficult to both prevent and detect.

25. Because all fraud involves some form of financial misstatement, how is fraudulent statement fraud different?

26. Explain the problems associated with lack of auditor independence.

27. Explain the problems associated with lack of director independence.

28. Explain the problems associated with questionable executive compensation schemes.

29. Explain the problems associated with inappropriate accounting practices.

30. Explain the purpose of the Public Company Accounting Oversight Board.

31. Why is an independent audit committee important to a company?

32. What are the key points of the ‘‘Issuer and Management Disclosure’’ of the Sarbanes- Oxley Act?

33. In this age of high technology and computer-based information systems, why are accountants concerned about physical (human) controls?

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