welcome to professional ethics ethical standards for certified · 2020. 5. 8. · ethical dilemmas...

Welcome to Professional Ethics

Ethical Standards For Certified Managerial Accountants (CMA’s)

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Ethical Standards for Certified Management Accountants (CMA’s)

Key Learning Objective

1. From the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice:

• Identify the four overarching ethical principles.

• Identify the four standards.

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Professional EthicsEthical Standards for CMA’s

IMA Statement on Ethical Professional Practice

• 4 “overarching” ethical principles.

1. Honesty.

2. Fairness.

3. Objectivity.

4. Responsibility.

• “Members shall act in accordance with these principles and shall encourage others in their organization to adhere to them”.

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IMA Standards of Ethical Professional Practice

• All members have the responsibility to adhere to 4 standards. Failure to comply with the standards may result in disciplinary action.

1. Competence.

2. Confidentially.

3. Integrity.

4. Credibility.

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IMA Standard #1: Competence (1 of 2)

• Focuses on carrying out duties.

1. Maintain appropriate level of expertise by continually developing knowledge and skills.

2. Provide decision support information and recommendations that are accurate, clear, concise, and timely. Recognize and help manage risk.

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IMA Standard #1: Competence (2 of 2)

• Focuses on carrying out duties (continued).

3. Perform duties in accordance with laws, regulations, and technical standards.

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IMA Standard #2: Confidentiality (1 of 2)

• Focuses on handling confidential information:

1. Keep information confidential except when disclosure is authorized or legally required.

2. Inform all relevant parties regarding appropriate use of confidential information. Monitor to ensure compliance.

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IMA Standard #2: Confidentiality (2 of 2)

• Focuses on handling confidential information (continued):

3. Refrain from using confidential information for unethical or illegal advantage.

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IMA Standard #3: Integrity (1 of 2)

• Focuses on public actions:

1. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

2. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

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Conflicts of Interest

• Personal conflicts of interest are any situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity. Examples include:

• Having a financial interest in a party doing business with your firm.

• Using privileged information for personal gain.

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Conflicts of Interest: Ethical Behavior versus Legal Behavior

• Legality does not define if a conflict of interest exists.

• Appearance and perception are important; Perception is often reality to the observer.

• Apparent conflicts can be as bad as real conflicts.

• “Clean smell” test. 11


IMA Standard #3: Integrity (2 of 2)

• Focuses on public actions (continued):

3. Abstain from engaging in or supporting any activity that might discredit the profession.

4. Contribute to a positive ethical culture and place integrity of the profession about personal interests.

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IMA Standard #4: Credibility (1 of 3)

• Focuses on developing and providing information, such as reports, analyses, recommendations.

1. Communicate information fairly and objectively.

2. Provide all relevant information that could reasonably be expected to influence the user’s understanding of the reports, analyses, and recommendations.

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• Focuses on developing and providing information (continued).

3. Report any delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

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• Focuses on developing and providing information (continued).

4. Communicate professional limitations or other constraints that would preclude responsible judgement or successful performance of an activity.

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Ethical Standards for Certified Management Accountants (CMA’s)

Wrap Up

You should be able to:

• From the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice:

• Identify the four overarching ethical principles.

• Identify the four standards.

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Ethical Dilemmas

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1. Understand how ethical issues such as manipulation of results, analysis, and budgets can develop.

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Professional EthicsEthical Dilemmas

Typical Ethical Dilemmas Accountants Face

There are 4 categories of ethical dilemmas unique to accountants that involve changing ormanipulating data or the result of an analysis.

1. Manipulating actual results.

2. Manipulating budgets and standards.

3. Manipulation of decision inputs.

4. Manipulation of analysis and results.

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Common Ethical Dilemma: Manipulation of Results

• Deliberately changing actual financial results is a fraudulent action.

• Unfortunately it is an all too common event.

• Large frauds in last 20 years include: WorldCom, Enron, Tyco, HealthSouth Adelphia Cable, AIG, Waste Management, and Lehman Brothers.

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Fraudulent Financial Reporting

• “Moving” costs from the income statement to the balance sheet is a common fraud.

• More sophisticated frauds involve fictitious revenue and earnings.

• We’ll examine 2 frauds involving financial reporting:

1. Sunbeam.

2. WorldCom.21


Fraudulent Reporting at Sunbeam

• Sunbeam was a NYSE traded, Fortune 500, consumer goods company. Brands included:

• Sunbeam appliances.

• Coleman camping equipment.

• Mr. Coffee coffeemakers.

• First Alert smoke alarms.

• Al Dunlap, a corporate “turnaround specialist”, became CEO in 1996.

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Possible Reasons for the Sunbeam Fraud

• Dunlap and CFO Russell Kersh were given financial incentives to increase Sunbeam’s stock price and sell the company.

• Dunlap and Kersh had a track record from a “successful restructuring” of Scott Paper (another NYSE/Fortune 500 company) prior to joining Sunbeam.

• Dunlap was known as “Chainsaw Al”, and was considered a “management guru”.

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“Mean Business”

• Al Dunlap’s autobiography was published in 1997 while he was at Sunbeam.

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Financial Reporting Fraud at Sunbeam (1 of 2)

• In reality, Dunlap and Kersh used a variety of fraudulent techniques to make it appear that their turnaround efforts were successful.

• Question to consider:

• How would you react if a new CFO directed you and the rest of the accounting staff to make false entries in order to increase profits?

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Financial Reporting Fraud at Sunbeam (2 of 2)

• According to a SEC civil suit filed in 2001, from 1996 to 1998 Sunbeam:

• Recorded revenue on contingent sales.

• Accelerated sales from later periods into future periods.

• Engaged in "cookie jar reserve” accounting.

• See the SEC’s civil complaint:

• https://www.sec.gov/litigation/admin/33-7976.htm26


https://www.sec.gov/litigation/admin/33-7976.htm

Cookie Jar Reserves

• “Cookie jar reserves" are inflated or wholly improper reserves recorded in a period and reversed in subsequent periods, artificially creating a year to year improvement.

• Sunbeam’s recorded improper reserves for:

• Corporate restructuring.

• Environmental remediation.

• Inventory obsolescence. 27


Aftermath of the Sunbeam Fraud

• According to the SEC: “…at least $60 million of Sunbeam's record-setting $189 million earnings in 1997 came from accounting fraud.”

• Dunlap was fired in 1998.

• In 2001, Sunbeam restated its 1996 to 1999 results and filed for bankruptcy.

• Dunlap paid $15 million to settle lawsuits, but admitted no wrongdoing.

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Who Committed the Sunbeam Fraud?

• While Al Dunlap and Russel Kersh clearly directed Sunbeam’s the fraud, they did not:

• Prepare journal entries

• Close the books.

• This work was performed members of the Sunbeam accounting staff.

• Following management directives is not a defense for wrongdoing.

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Fraudulent Reporting at WorldCom (1 of 4)

• WorldCom was a Fortune 50 telecommunications company based in Clinton, Mississippi. It was traded on the NASDAQ (“WCOM”).

• Financial engineering: The “goal” was to keep line costs at less than 42% of revenue and report double-digit revenue growth:

• Line costs were over 50% of revenue.

• Actual growth was significantly lower. 30



• The fraud took place from 1998 to 2002.

• It was not a sophisticated; it as accomplished by fake journal entries.

• The initial fraud was uncovered by WorldCom’s internal audit staff, revealing capitalizing expenses increased profits by almost $4 billion through the first quarter of 2002.

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• The internal auditing department subsequently faced great risk as whistleblowers

• A subsequent SEC investigation revealed that from 1999 to 2002 WorldCom improperly reduced its reported costs (and increased pre-tax income) by over $7 billion.

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• WorldCom filed for bankruptcy in July 2002

• In June 2002, WorldCom’s audit firm Arthur Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron.

• In 2003 WorldCom merged with MCI, keeping the MCI name. MCI was purchased by Verizon Communications in 2006 for $7.6 billion.

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WorldCom’s “Tone at the Top” (1 of 3)

• Let’s take a look at the actions of CFO Scott Sullivan and CEO Bernie Ebbers.

• Scott Sullivan

• CFO, treasurer, secretary, and executive vice president from 1994 until 2002.

• Sullivan was known for ostentatious displays of wealth; he built a 24,000 square foot mansion in Boca Raton Florida.

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• Bernie Ebbers

• One of the founders of Long Distance Discount Services, Inc., which grew into WorldCom though many acquisitions.

• At his peak in early 1999, Ebbers was worth an estimated $1.4 billion and listed at number 174 on the Forbes 400.

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• Ebbers personal holdings in 1999 included:

• Canada's biggest ranch.

• Hotels in southeastern US.

• 540k acres of timberlands in southeastern US.

• A minor league hockey team.

• A trucking firm.

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From C-Suite to Prison (1 of 2)

• After the fraud was discovered, WorldCom’s board of directors asked Sullivan to resign.

• He refused and was fired.

• In August 2002 Sullivan was arrested and charged with seven counts of fraud.

• He entered a guilty plea and agreed to testify against CEO Bernard Ebbers.

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From C-Suite to Prison (2 of 2)

• In March 2004 Ebbers was charged with security fraud, conspiracy, and filing false statements with securities regulators.

• Ebbers was found guilty of all charges in March 2005, and received a 25-year sentence.

• Sullivan was released from jail in August 2009.

• Three other members of the WorldCom team also received prison sentences.

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Worldcom’s Fraud Had Wide Ranging Implications

• Over 57,000 employees lost jobs.

• Over $180 billion of shareholder value was lost…..forever.

• Mid-1999 share value: $65.50

• June 2002 share value: $.01

• Paid a $750 million settlement to the SEC.

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A Small Silver Lining

• Cynthia Cooper, the WorldCom VP of internal audit who found and reported the fraud, was named one of three “People of the Year” by Time Magazine in 2002.

• The issue highlighted 3 whistleblowers.

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Want to Read More?

• The below link is to the SEC’s report from their special investigation into the WorldCom scandal. It is over 340 pages, and a wealth of information.

• https://www.sec.gov/Archives/edgar/data/723527/000093176303001862/dex991.htm#ex991902_72

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https://www.sec.gov/Archives/edgar/data/723527/000093176303001862/dex991.htm#ex991902_72

Question to Consider

What would you do if you were directed to make, or were aware of journal entries that improperly recorded expenses as assets?

Correct entry

• Maintenance Expense

• Accounts Payable

Incorrect entry

• Fixed Assets


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Ethical Dilemmas Wrap Up


• Understand how ethical issues such as manipulation of results, analysis, and budgets can develop.

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Resolving Ethical Dilemmas

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1. Recommend the appropriate course of action for management accountants to take when confronted with ethical dilemmas.

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Professional EthicsResolving Ethical Dilemmas

Question to Consider

What would you do if you were directed to make, or were aware of journal entries that improperly recorded expenses as assets?

Correct entry

• Maintenance Expense


Incorrect entry

• Fixed Assets


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The Moment of Truth – What Would YouDo If You Are Aware of an Ethical Issue?

• In addition to fraudulent financial reporting, unethical behavior can arise from:

• Developing budgets and standards.

• Manipulation of decision inputs.

• Manipulation of analysis and results.

• What should you do when faced with an ethical issue?

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Resolution of Ethical Conflict (1 of 5)

• Accounting and finance professionals should not ignore unethical issues or behavior, they should actively seek resolution of the issue.

• The IMA’s “Statement of Ethical Professional Practice” recommends the following to its members:

• In determining which steps to follow, the member should consider all risks involved and whether protections exist against retaliation.

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• “IMA Statement of Ethical Professional Practice”

• The IMA offers an anonymous helpline that the member can call to discuss how the IMA’s Statement of Ethical Professional Practice could be applied to the ethical issue.

• The member should follow established policies of the organization, including an anonymous reporting system, if available.

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• If the organization does not have established policies, the member should consider the following courses of action:

1. The resolution process could include a discussion with the member’s immediate supervisor.

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2. If the supervisor appears to be involved, the issue could be presented to the next level of management.

3. The member should consider consulting their own attorney to learn of any legal obligations, rights, and risks concerning the issue.

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4. If resolution efforts are not successful, the member may wish to consider disassociating from the organization

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IMA Ethics Helpline (1 of 2)

• In the US and Canada, dial (800) 245-1383.

• In other countries, dial the AT&T USA direct access number fromwww.att.com/esupport/traveler.jsp?tab=3then the above 800 number.

• The IMA Helpline is designed to provide clarification of the provisions of the Statement of Ethical Professional Practice.

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http://www.att.com/esupport/traveler.jsp?tab=3

IMA Ethics Helpline (2 of 2)

• Confidentiality is maintained at all times.

• The IMA Ethics helpline is not to be used to report specific suspected ethical violations.

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Resolving Ethical Dilemmas Wrap Up


• Recommend the appropriate course of action for management accountants to take when confronted with ethical dilemmas.

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The Fraud Triangle

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The Fraud Triangle Key Learning Objectives

1. Define fraud and collusion.

2. Identify the three components of the Fraud Triangle model.

3. Use the Fraud Triangle model to explain how accountants can identify and manage the risk of fraud.

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Professional EthicsThe Fraud Triangle

Fraud and Collusion

• Fraud - wrongful deception intended to result in financial or personal gain.

• In the US legal system, fraud is a specific criminal activity with certain features.

• Collusion – two or more employees acting in secret to commit a fraud.

• In general, collusion is harder to prevent and detect than fraud.

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Need Determines Type of Fraud

1. Need for cash:

• May result in embezzling assets.

• Embezzlement: Theft or misappropriation of funds placed in one's trust or belonging to one's employer.

2. Need for recognition, continued employment, company success, etc.:

• May result in fraudulent financial reporting.

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A Frequent Fraud Component: Management Override

• Management override – A person in authority directs individuals who they have influence over to circumvent control procedures to achieve:

• Personal gain (cash).

• Improper presentation of the company’s financial condition or compliance status.

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Management Override Examples

• Need for cash:

• Directing subordinates to make payments to fictious companies, inappropriate individuals, etc.

• Need for recognition, employment, bonuses, stock gains, etc.

• Directing subordinates to record inappropriate journal entries, create false forecasts, etc.

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Detecting Management Override

• Management override may make fraud difficult to detect due to management’s:

• Familiarity with the day to day operations.

• High levels of authority.

• Input in designing and implementing controls.

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Need for Cash: Beware the Slippery Slope (1 of 3)

• After Nathan Mueller’s company was purchased by ING for $6 billion, he played a key role in the transition to ING’s ERP system.

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• Mueller discovered he had the authority to sign and approve sign checks up to $250,000.

• He could cut a check, sign it as somebody else in the department — the department employees shared passwords — and then approve the check as himself.

• His first embezzled check was for $1,100 to pay off a credit card.

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• This spiraled into an $8.5 million fraud over the next four years.

• It was only a co-worker’s suspicions (one of the people whose password he used) that brought the fraud to light.

• After being caught, he pleaded guilty and was sentenced to 97 months in federal prison.

• He was released in 2014. 65


Need for Company Success: Cooking the Books

• HealthSouth was founded in 1984 and went public in 1986.

• It was considered a “hot stock” among financial analysts.

• In 1996 a fraud to conceal losses started.

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Need for Company Success: Cooking the Books

• The CEO of HealthSouth, Richard Scrushy, is alleged to have ordered the initial fraudulent reporting.

• He told the Controller and CFO to “fix the numbers” when briefed on lower actual earnings versus the forecast provided to analysts at the end of Q2 1996.

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Management Override at HealthSouth (1 of 2)

• Aaron Beam was a HealthSouth co-founder and first CFO.

• He was directed by the CEO to adjust the books so HealthSouth met earnings targets.

• He did. 68


Management Override at HealthSouth (2 of 2)

• Aaron Beam retired from HealthSouth in 1997.

• Winston Smith, the CFO in 2003, revealed the fraud rather than sign-off on the Sarbanes Oxley assertions.

• By then, the fraud totaled over $2.8 billion.

• Beam, Smith, and many others went to jail as a result of their actions; Scrushy did not.

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Donald Cressey

• PhD in Sociology.

• Professor at University of California, Santa Barbara.

• Co-author of “Principles of Criminology” considered as one of the most authoritative works in the field of criminology.

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A Scientific Look at Embezzlement

“Other People's Money: A Study in the Social Psychology of Embezzlement” by Donald Cressey; 1973.

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From Trusted Person to Trust Violator

• Cressey’s hypothesis outlined in “Other People’s Money” is the trusted persons become trust violators when three conditions are present.

1. Pressure.

2. Opportunity.

3. Rationalization

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Fraud Triangle

RationalizationOpportunity

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Pressure

Donald Cressey’s hypothesis is the basis of theFraud Triangle.


3 Conditions for Trusted Persons to Become Trust Violators (1 of 2)

1. Pressure: Violators believe they have a financial problem which is non-shareable.

2. Opportunity: Violators are aware their problem can be secretly resolved by violating their position of financial trust.

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3 Conditions for Trusted Persons to Become Trust Violators (2 of 2)

3. Rationalization: Violators apply to their own conduct verbalizations to make the fraud acceptable to themselves.

• This helps them to adjust their view of themselves as trusted persons with their view of themselves as users of the entrusted funds or property.

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Fraud Triangle #1: Pressure

• Pressure is the person’s or group’s reason ormotivation to commit the fraud.

• Pressure manifests a “need”:

• Need for cash.

• Need for recognition, employment, increased salary, promotion, bonus, stock gains, etc.

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Fraud Triangle #2: Opportunity

• Ability of person or group of people to:

• Perpetrate (carry out) a fraud

• Conceal discovery of the fraud after it occurs.

• Opportunity is created by:

1. Poor internal controls.

2. Lack of effective oversight.

3. Lack of enforcement of internal controls.

4. Management override of internal controls. 77


Fraud Triangle #3: Rationalization

• Ability of person or group of people to justify actions consistent with their personal code of ethics.

• Personal codes of ethics vary by individuals.

• Rationalization is the most difficult fraud characteristic to appraise and prevent.

• It is difficult to understand and have controls on individual personal codes of ethics.

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Fraud Rationalization Examples

• Fraud rationalizations include:

1. Desire for revenge.

2. Feeling underappreciated.

3. Feeling underpaid.

4. Believing others are also engaged in fraud.

5. Believing the need for fraud is temporary and will be corrected or paid back in the future.

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Nathan Mueller’s Fraud Triangle

• Pressure: Personal credit card debt.

• Opportunity: Could get a fraudulent check cut, signed, and mailed by himself.

• Rationalization: Will pay the embezzled funds back (at least initially).

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Health South’s Fraud Triangle

• Pressure: Need to keep corporate earnings in line with analyst estimates.

• Opportunity: With senior management override, no one could stop it. In fact there was significant pressure for employees and to join the fraud once it started.

• Rationalization: Will reverse the fictious entries as soon as the business improves.

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The Fraud Triangle Wrap Up


• Define fraud and collusion.

• Identify the three components of the Fraud Triangle model.

• Use the Fraud Triangle model to explain how accountants can identify and manage the risk of fraud.

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Ethical Versus Legal Behavior

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Ethical Versus Legal Behavior Key Learning Objective

1. Distinguish between legal and ethical behavior.

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Professional EthicsEthical versus Legal Behavior

Ethics vs. Legality

• Ethical behavior is different from legal compliance.

• Ethical standards are based on the human principles of right and wrong.

• Legal standards are based on written law.

• Something can be legal but not ethical.

• Can you tell the difference?

• Does the action pass the “clean smell test”.85


Mini Case Study: Big Lots Not Illegal, But Was It Ethical? (1 of 6)

• In March 2012 over 10 Big Lots (NYSE: BIG). senior executives sold more than $23 million in stock, outside of preset trading plans.

• Steven Fishman, Big Lots CEO, sold $10.3 million of Big Lots stock at an average price of $45 on March 20, 2012.

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Not Illegal, But Was It Ethical? (2 of 6)

• The stock sales was the largest unplanned trading in a month in the previous eight years.

• March 31, 2012: At the end of Q1, Big Lots stock closed at $45.24/share.

• April 24, 2012: Big Lots told investors its revenue growth slowed; Big Lots closed at $34.71/share.

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• The shares Mr. Fishman sold on March 20, 2012 would have been worth $2.4 million less on April 24, 2012.

• In December 2012 the SEC started an investigation regarding trading activity by senior executives at Big Lots.

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• The questions the SEC investigated were:

• When did Mr. Fishman and his executive team know Big Lots revenue growth was declining?

• Did they use any confidential information for their personal gain?

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• Mr. Fishman retired in December 2012 to “spend more time with his family”.

• In March 2013, the SEC advised Big Lots that the investigation was closed and that there would not be any enforcement actions.

• Although the actions of Big Lots executives were not illegal, did their conduct impact Big Lots “ethical culture”?

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Not Illegal, But Is it Ethical? (6 of 6)

• What “tone at the top” did Mr. Fishman and the other executives on his team develop?

• What impact did finding out about the executives stock trading have on employees whose value of Big Lots stock they owned decreased 23% after the Q1 2012 earnings announcement?

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Ethical Versus Legal Behavior Wrap Up


• Distinguish between legal and ethical behavior.

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The Foreign Corrupt Practices Act, The Sarbanes-Oxley Act, and Ethics

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The Foreign Corrupt Practices Act, The Sarbanes-Oxley Act and Ethics

Key Learning Objectives (1 of 2)

1. Identify the purpose of the Foreign Corrupt Practices Act (FCPA) and the practices it prohibits.

2. Identify the requirements of Sarbanes-Oxley Act (SOX) Section 406, Code of Ethics for Senior Financial Officers.

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Professional EthicsFCPA, SOX and Ethics


Key Learning Objectives (2 of 2)

3. Discuss the issues organizations face applying values and ethical standards internationally.

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Ethics and Legal Compliance

• 2 key US laws related to ethics and accounting:

• Foreign Corrupt Practices Act of 1977.

• Sarbanes-Oxley Act of 2002.

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Foreign Corrupt Practices Act (FCPA) (1 of 2)

• The FCPA is an amendment to the Securities Exchange Act of 1934, which regulates publicly traded companies.

• The FCPA was passed in 1977; it was a response to over 400 publicly traded companies making more than $300 million of illegal payments to foreign officials in the 1970’s.

• Firms included Lockheed, Chiquita, and Gulf.

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Foreign Corrupt Practices Act (FCPA) (2 of 2)

• “Anti-Bribery and Books and Records Provisions”. 3 key elements:

1. Prohibits payments to foreign government officials to gain business.

2. Firms must have accounting standards for books and records.

3. Firms must have a system of internal accounting controls.

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FCPA Element #1:Prohibits Payments to Foreign Officials

• Prohibits payments to foreign officials and politicians in order to induce the recipient to act or refrain from acting so a US company might obtain or retain business.

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FCPA Element #1:Payments to Foreign Officials (1 of 3)

• Bribery is defined as a payment made to

Induce the recipient, to act or not act, in order to enable the US company to obtain business.

• “Obtain business”: Get new business and/or retain existing business

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• Exception for routine governmental action

• Does not apply to any payments made to governmental officials to facilitate or expedite the performance of a routine governmental actions.

• However, routine payments may not be bribes.

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• The distinction between for routine governmental action versus paying bribes that will result in the company obtaining business underscores challenges of US based multi-nationals doing business outside the US.

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Wrap Up (2 of 2)

You should be able to (continued):

• Discuss the issues organizations face applying values and ethical standards internationally.

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FCPA Element #2: Accounting Requirements

US public companies are required to:

• Make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company.

• Dispositions of assets: Distributing or transferring assets - property, inventory, cash.

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FCPA Element #3:Internal Controls (1 of 4)

US public companies are required to devise a system of internal accounting controls sufficient to provide reasonable assurances that:

1. Transactions are executed in accordance with management's general or specific authorization.

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FCPA Element #3:Internal Controls (2 of 4)

2. Transactions are recorded as necessary to:

• Prepare GAAP financial statements.

• Maintain accountability for assets.

3. Accounts are reconciled (amounts are compared with supporting details) at reasonable intervals and appropriate action is taken with respect to any differences.

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FCPA Element #3: Internal Controls (3 of 4)

• For example:

• Conduct physical inventories, compare to financial records, make general ledger adjustments.

• Confirm account receivables, compare to financial records, make general ledgers adjustments.

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FCPA Element #3: Internal Controls (4 of 4)

4. Access to assets is permitted only in accordance with management's general or specific authorization.

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Applications of the FCPA • We are going to take a look at how the FCPA has

been enforced: • Johnson & Johnson • Wal-Mart

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Foreign Corrupt Practices Act: Johnson & Johnson (1 of 2)

• In 2011 Johnson & Johnson agreed to pay $70 million to settle U.S. and U.K. allegations it paid bribes to obtain business in Greece, Romania, and Poland.

• J&J actually self-reported (informed) U.S. authorities about the violations in 2007.

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Foreign Corrupt Practices Act: Johnson & Johnson (2 of 2)

• The bribery netted J&J business worth approximately $32 million.

• J&J acknowledged responsibility for “various improper payments to publicly employed health care providers...in order to induce the purchase of medical devices and pharmaceuticals manufactured by J&J subsidiaries.”

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Foreign Corrupt Practices Act: Wal-Mart (1 of 5)

• Companies wishing to sell their products in Wal-Mart go through a rigorous selection process.

• In the United States Wal-Mart has strict policies for regarding its employees and its vendors.

• ..purchasing agents…“…can’t accept so much as a coffee mug from vendors”

“The Curious Capitalist”; Rana Foroohar.

Time Magazine May 7, 2012.112



• In 2012 Mexico was a key Wal-Mart region.

• 20% of all Wal-Mart stores worldwide were in Mexico, and Wal-Mart was Mexico’s largest private employer.

• In April 2012 the New York Times reported that Wal-Mart's Mexico subsidiary paid over $24 million in bribes to local officials to obtain construction permits for new stores.

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• Tone at the Top: The Wal-Mart CEO at the time, H. Lee Scott, is alleged to have approved the bribes, then organized a cover up. Reference:

• “Vast Mexican Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”; David Barstow. New York Times, April 21, 2012

• http://www.nytimes.com/interactive/business/walmart-bribery-abroad-series.html.

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• Through Feb 2019, Wal-Mart spent over $901 million on legal fees, investigations, and revamping its worldwide FCPA compliance.

• $439 million in FY 2013-2014

• $299 million in FY 2015-2016

• $139 million In FY 2017-2018.

• $ 24 million in FY 2019 (Q1,Q2, Q3).

• Source: www.fcpaprofessor.com115


http://www.fcpaprofessor.com/


• In a November 2017 SEC filing, Wal-Mart said it reserved an additional $283 million for a possible FCPA settlement.

• No word on a settlement as of February 2019.

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FCPA Challenges: Applying Ethics Worldwide

• Regardless of local practices, American companies subject to the Foreign Corrupt Practices (FCPA) must not engage in bribery.

• The Johnson & Johnson and Wal-Mart cases illustrate the challenges multi-nationals face applying ethical standards outside the US.

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Why Didn’t the FCPA prevent Enron, WorldCom, HealthSouth, etc.? (1 of 2)

• Despite the internal control mandate of the FCPA, there were a number of high profile cases where companies had huge breakdowns in internal controls in the period of 1990’s – 2002.

• Although the FCPA required public companies to have a system of internal controls, the FCPA did not mandate accountability.

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Why Didn’t the FCPA prevent Sunbeam, WorldCom, Enron, etc.? (2 of 2)

• The FCPA does not assign someone in an organization the clear and unquestioned responsibility to assure that internal controls are in place and followed.

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Catalyst for Sarbanes Oxley Act

• Massive frauds from late 1990’s to 2002 led to a loss of trillions of dollars in market value for publicly traded companies including Enron, WorldCom, and Tyco.

• In April 2002 legislation sponsored by Rep. Michael Oxley, the "Corporate and Auditing Accountability, Responsibility, and Transparency Act" passed the US House of Representatives.

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Catalyst for Sarbanes Oxley Act

• At the same time, the Senate Banking Committee, headed by Senator Paul Sarbanes, undertook a series of high profile hearings, including testimony from executives at firms with fraud.

• The resulting “Sarbanes-Oxley Act” was passed by the House and Senate and signed into law in July 2002.

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Key Issues Addressed In Sarbanes-Oxley

• Inadequate oversight of audit firms.

• Lack of auditor independence.

• Weak corporate governance procedures.

• Stock analysts' conflict of interests.

• Inadequate disclosure provisions.

• Insufficient funding of the Securities-Exchange Commission enforcement capabilities.

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Sarbanes-Oxley Act of 2002 (SOX) (1 of 2)

• Legal requirement for ethical standards.

1. Assigned the CEO and CFO the responsibility to develop and maintain internal controls.

2. Mandated an independent audit committee with one member being a financial expert.

3. Independent audit committee – no officers of the company; all outside directors.

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Sarbanes-Oxley Act of 2002 (SOX) (2 of 2)

3. SOX Section 406 requires firms to disclose whether they have adopted a code of ethics for senior financial officers or explain why they have not adopted a code.

• For more info on the Sarbanes–Oxley Act, including the full text of the Act, http://www.sox-online.com/

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Sarbanes Oxley Section 406:Code of Ethics (1 of 2)

• Code of ethics means standards reasonably necessary to promote:

• Full, fair, accurate, timely, and understandable disclosure in the required periodic reports filed by the issuer.

• 10-Q: Quarterly reports

• 10-K: Annual reports.

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Sarbanes Oxley Section 406:Code of Ethics (2 of 2)

• Code of ethics means standards reasonably necessary to promote (continued):

• Compliance with applicable governmental rules and regulations.

• Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships.

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Wrap Up (1 of 2)


• Identify the purpose of the Foreign Corrupt Practices Act, and the practices that the Act prohibits.

• Identify the requirements of Sarbanes-Oxley Act (SOX) Section 406, Code of Ethics for Senior Financial Officers.

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Wrap Up (2 of 2)


• Discuss the issues organizations face applying values and ethical standards internationally.

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Ethical Considerations for Organizations

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Ethical Considerationsfor Organizations

Key Learning Objectives

1. Discuss corporate responsibility for ethical conduct.

2. Explain the importance of ethical codes of conduct for organization.

3. Demonstrate an understanding of the role that “leadership by example” plays in determining an organization’s ethical environment.

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Professional EthicsEthical Considerations for Organizations

The Value of An Ethical Organization

• Organizations have a responsibility to foster a sense of ethics in employees and agents.

• Ethical values can benefit organizations by developing standards for “unexpected” events.

• The value of an ethical organization is financially unquantifiable, but invaluable.

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How Accountants Can Use Ethics to Add Value (1 of 2)

Accountants add value to their organization when they:

1. Identify gaps between expected and actual ethical behavior.

2. Address the gaps through plans, programs, and interventions.

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How Accountants Can Use Ethics to Add Value (2 of 2)

3. Assure the desired ethical behaviors permeate every aspect of the organization.

4. Develop indicators that measure the level of ethical behavior, assuring there is a favorable

organizational impact.

• Could be a metric for the internal processes on a Balanced Scorecard.

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Establishing an Ethical Culture (1 of 2)

• An ethical culture requires the ability to link daily decisions to an aspect of ethical commitment.

• An ethical culture starts with an assessment of the existing organizational values and culture.

• Based on the assessment, statements should be developed that define the organization’s ethical principles. • Ethical code of conduct.

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Ethical Code of Conduct (1 of 2)

• A key statement all organizations should adopt is an ethical code of conduct outlining beliefs, values, and expectations.

• Also called a code of ethics or code of conduct, it may include: • Guide of principles to help professionals

conduct business honestly and with integrity. • May outline the mission and values of the

business or organization. 135


Ethical Code of Conduct (2 of 2)

• Code of ethics (continued). • How professionals are supposed to approach

problems. • Ethical principles based on the organization's

core values and the standards to which employees are held.

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Code of Conduct and Conflicts of Interest (1 of 2)

• A ethical code of conduct should include a conflict of interest provision, which should:

1. Require financial disclosure by managers of interests in any related businesses.

2. Prohibit financial ties to parties doing business with firm.

3. Require advanced notice of questionable transactions.

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Code of Conduct and Conflicts of Interest (2 of 2)

4. Require employees to refuse gifts that could be perceived to influence actions.

• Proactive suggestion: Avoiding all gifts from vendors and suppliers significantly reduces the perception that any gift will influence a future decision, making it easier to put the code of conduct into force.

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Leadership by Example (1 of 2)

• “Tone at the Top” is critical.

• Senior managers must demonstrate ethical behavior while executing their day-to-day work, including:

1. Transparent communication at all levels, internally and externally.

2. Involving others in decision making.

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Leadership by Example (2 of 2)

• Senior managers must demonstrate ethical behavior while executing their day-to-day work (continued):

3. How they coach and support others.

4. Staff development, performance issues, and reviews.

5. Their own personal behavior at work.

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Control Environment: “Tone at the Top” (1 of 2)

1. Organizational structure.

• Clear lines of reporting and authority.

• Attitudes toward risk, integrity, and ethical values.

2. Policies and procedures.

• Existence and adherence.

• In use to reinforce proper internal control.

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Control Environment: “Tone at the Top” (1 of 2)

3. Business and financial objectives and goals.

• Need to be realistic and achievable.

• A common tactic by unethical executives is holding managers “accountable” for an unrealistic plan or budget, creating an atmosphere were unethical behavior is rewarded.

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Importance of the “Tone at the Top” (1 of 2)

• In 2010 Mercedes-Benz (DaimlerAG) paid $185 million to settle a bribery investigation with the SEC, and decided to place emphasis on ethical compliance.

• In 2011, Mercedes-Benz’s Head of US operations was dismissed after questions were raised about his adherence to the company’s expense and compliance policies.

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Importance of the “Tone at the Top” (2 of 2)

• The Mercedes Benz Head of US operations was alleged to have billed the company personal expenses, including work done on his home and personal travel.

“Expenses Fell Mercedes Boss”.

Wall Street Journal; October 20, 2011

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Related to “Tone At The Top” or Coincidence?

• On July 18, 2017 Mercedes-Benz parent company Daimler issued a major recall in Europe to fix diesel vehicles amid speculation that the company violated emissions standards.

• Daimler offered free repairs to more than 3 million vehicles in Europe to reduce nitrous oxide emissions at a cost of $254 million.

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Ethical Dilemmas at Enron (1 of 2)

• "Enron's compensation and performance management system …..contributed to a dysfunctional corporate culture that becameobsessed with short-term earnings to maximize bonuses. Employees …often disregarded the quality of cash flow or profits, in order to get a better rating on their performance review…….”

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Ethical Dilemmas at Enron (2 of 2)

• " …Additionally, future deals were recorded as soon as possible to keep up with executives received cash bonuses and options”

• Dharan, Bala and Bufkins, William, R. “Red Flags in Enron's Reporting of Revenues and Key

Financial Measures”. (July 23, 2008)

• http://ssrn.com/abstract=1172222

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Ethics and Internal Controls (1 of 2)

• Ethical culture is part of internal control environment.

• Firms need to have an effective whistle-blowingframework in place.

• “Ethics hotline”: Sarbanes-Oxley requires audit committees to develop a formal process to receive and act on ethics complaints.

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Ethics and Internal Controls (2 of 2)

• Business process reengineering, quality management, and process management can be used to identify process controls related to ethics.

• International practices and expectations may differ from US standards.

• Foreign Corrupt Practices Act challenges.

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Practical Application: Converting Intent into Operational Reality

• Hiring and training practices are important part of ethical culture.

• Companies should consider appointing an “Ethics Officer” who would have the ability to identify ethics issues throughout the organization.

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Measuring and Improving Ethical Compliance (1 of 2)

• Ethical compliance should be assessed objectively:

1. Surveys can rate how well the organization follows the code of ethics.

2. Key Performance Measures (KPI’s) should include survey results and ethics training.

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Measuring and Improving EthicalCompliance (2 of 2)

• Ethical compliance should be assessed using objective measures (continued)

3. Performance review and development systems must align with the firms ethical framework.

4. “Human Performance Feedback Loop”

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Ethical Considerations for Organizations Wrap Up (1 of 2)


• Discuss corporate responsibility for ethical conduct.

• Explain the importance of an ethical code of conduct for organizations.

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Ethical Considerations for OrganizationsWrap Up (2 of 2)


• Demonstrate an understanding of the role “leadership by example” plays in determining an organizations ethical environment.

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