Chapter Questions and Case Solutions

Business & Professional Ethics for Directors, Executives & Accountants,8e Leonard J. Brooks and Paul Dunn Cengage Learning, Boston, MA, 2018 Chapter 2 – Ethics & Governance Scandals Chapter Questions and Case Solutions Chapter Questions...................................................................2 Case Solutions.........................................................................9 Business and Professional Ethics for Directors Executives Accountants 8th Edition Brooks Solutions Manual Visit TestBankDeal.com to get complete for all chapters

P a g e | 2 Business & Professional Ethics for Directors, Executives & Accountants, 8e L.J. Brooks & P. Dunn, Cengage Learning, 2018 Chapter Questions 1.Do you think that the events recorded in this chapter are isolated instances of business malfeasance, or are they systemic through the business world?The events chronicled in this chapter range over an eighty-year period from 1929 to 2010.During that time there were horrendous business failures, frauds and debacles that cost investors, consumers, taxpayers, and the general public billions and billions of dollars, not only in the United States, but around the world. The scandals were worldwide, involving hundreds of companies, only some of whom are mentioned in this chapter. At the same time, however, throughout the world, there were millions of businesses that were supplying the goods and services needed by society, in an efficient and effective manner. They were operating within the law and ethical standards.The examples provided in this chapter, and throughout the textbook are aberrations. Most people and businesses, most of the time, act and behave in a responsible manner. They obey the law, ethical norms, and social standards of behavior. However, if executives, directors and accountants are not mindful of the ethical dangers that lurk in the business world, then they too can become part of this aberration that is so costly to society. These business exceptions challenge the integrity and humanity of everyone who has anything to do with business.

2.The events recorded in this chapter have given rise to legislative reforms concerning how business executives, directors, and accountants are to behave. There is a recurring pattern of questionable action followed by more stringent legislation, regulation, and enforcement. Is this a case of too little legislation being engaged too late to prevent additional business fiascos?No amount of legislation can ever prevent crimes from occurring. One key to preventing additional business fiascos from occurring is to create a business environment in which the focus of business is clear. The purpose of business is not to make a profit at any cost. Moreover, profit is the consequence of providing goods and services required by society, in an efficient and effective manner, while operating within the law and ethical standards. The more efficient and effective the operations, the more profits the business will generate. For far-sighted corporations, profits are not the goal; they are the consequence of action.Many of the fiascos discussed in this chapter relate to greedy business leaders who, perhaps through hubris, lost sight of the goal of business. By focusing on profits they began to compromise their ethical standards, and so began a downward spiral that resulted in fraud and bankruptcy.

3.Is there anything else that can be done to curtail this sort of egregious business behavior other than legislation?Yes, boards and directors and executives can be educated to understand that unethical behavior is bad for business, and that reputation, which determines success, depends on ethical behavior.

P a g e | 3 Business & Professional Ethics for Directors, Executives & Accountants, 8e L.J. Brooks & P. Dunn, Cengage Learning, 2018 Archie Carroll, for example, (“The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons, July-August, 1991) has argued that businesses must first and always obey the law. Then they must be economically viable.They do this by operating in an efficient and effective manner. Next, they must behave with the highest ethical standards. Finally, businesses must give back to society. If businesses follow these four steps, as well as the lessons contained in this textbook, there will be less need for legislation to govern business behavior.

4.Many cases of financial malfeasance involve misrepresentation to mislead boards of directors and/or investors. Identify the instances of misrepresentation in the Enron, Arthur Andersen, and WorldCom cases discussed in this chapter. Who was to benefit, and who was being misled?Additional information on each case is included in Chapter 9 of the sixth edition of the text, which is available in the Digital Resources for the eighth edition (see www.cengagebrain.com ).Enron Misrepresentation Result Who Benefited Premature recognition of revenue using ‘prepays’ Overstatement of revenue These frauds resulted in net income and stock to increase, which benefited senior management that had lucrative stock options Syndication of special purpose entities (SPEs) Understatement of expenses Conflicts of interest by ⋅Senior management ⋅Board of directors Financial rewards to the related parties

Financial rewards to:

⋅Jeffery Skilling ⋅the board members False financial statements audited by Arthur Andersen Fraudulent financial reporting Senior management at Enron and partners at Arthur Andersen Investors, regulators, employees and the general public were all mislead and harmed by this fraud.Arthur Andersen Misrepresentation Result Who Benefited Culture focused on revenue production primarily through non-audit services Compromise on audit quality In the short-run, all the partners who shared in the profits derived from providing lucrative non-audit services to Enron Removal of Carl Bass, quality control partner, from providing oversight on the Enron audit Permitted David Duncan to accept the accounting policies of Enron

P a g e | 4 Business & Professional Ethics for Directors, Executives & Accountants, 8e L.J. Brooks & P. Dunn, Cengage Learning, 2018 The partners and employees of Arthur Andersen lost their jobs when the accounting partnership collapsed; all of Arthur Andersen’s clients had to find new accountants.WorldCom Misrepresentation Result Who Benefited Capitalized expenses Overstatement of net income Ebbers, Sullivan, and all the other WorldCom executives and board members that held lucrative stock options No oversight of the CEO Ebbers could orchestrate the fraud Investors, regulators, employees and the general public were all mislead and harmed by this fraud.

5.Use the Jennings “Seven Signs” framework to analyze the Enron and WorldCom cases in this chapter.Jennings ‘Sign’EnronWorldCom Pressure to meet goals, especially financial ones Senior executives had lucrative stock options Pressure after the collapse of Sprint takeover.Ebbers ordered Sullivan to ‘hit the numbers’ Closed organizational cultureConflicts of interests became acceptable business behaviors This is detailed in Chapter 9 of the textbook CEO with sycophants Board ignored complaints from whistleblower No one challenged Ebbers’ authority Weak board of directorsPowers Report and Senate Subcommittee Report blamed the board for a failure to provide oversight This is detailed in Chapter 9 of the textbook Nepotism and favoritismNone None Hubris This is detailed in Chapter 9 of the textbook Ebbers had unlimited power with no oversight Ethical trade-offs None None