Ethics in Business and Computer Ethics

Ethics in Business

• Ethical standards depend on societal norms and personal beliefs, but they are not universally agreed-upon.
• Differing ethical views can exist among individuals who believe they are acting ethically.

Business Ethics

• Ethics are the principles guiding individual conduct and choices in situations involving right and wrong.
• Business ethics addresses how managers determine the right course of action and how they achieve it.
• Business ethics encompasses equity, rights, honesty, and how corporate power is exercised.

Computer Ethics

• Computer ethics analyzes the impact of computer technology on society.
• It formulates policies for the ethical use of technology.
• It covers software, hardware, and networks.

Main Issues in Computer Ethics

• Privacy is a key ethical concern.
• Security involves accuracy and confidentiality of data.
• Ownership of property is a consideration.
• Equitable access to technology is important.
• Environmental issues related to technology use are relevant.
• The development and use of artificial intelligence raise ethical questions.
• Job displacement due to technology is an ethical consideration.
• Misuse of computers presents ethical challenges.

Sarbanes-Oxley Act (SOX) and Ethics

• SOX is significant legislation addressing capital markets, corporate governance, and auditing.

Main Ethical Issues related to SOX

• Conflicts of interest must be addressed.
• Full and fair disclosure of information is essential.
• Legal compliance is required.
• Internal reporting of code violations is necessary.
• Accountability is a key ethical principle.

Fraud Defined

• Fraud involves misrepresentation of facts with the intent to deceive, leading to detriment for the relying party.
• A fraudulent act has five conditions under common law:
  • False representation or non-disclosure of facts
  • Material fact that induces action
  • Intent to deceive
  • Justifiable reliance on the misrepresentation.
  • Injury or loss resulting from the deception.

Levels of Fraud Encountered by Auditors

• Employee fraud is usually for personal gain by converting company assets.
• Employees bypass internal controls for personal gain.

Steps of Employee Fraud

• Stealing assets is the first step.
• Converting the asset to cash is the second step.
• Concealing the crime is the final step.
• Management fraud can cause significant damage and loss to an organization.
• Management fraud typically involves something other than direct theft of assets.

Characteristics of Management Fraud

• The fraud occurs at management levels above where internal controls apply.
• Usually involves creating an illusion of a healthier, more prosperous entity through the financial statements.
• Asset misappropriation is hidden within complex transactions with third parties.

The Fraud Triangle

• The fraud triangle consists of three contributing factors, or associations with, management and employee fraud.

Elements of the Fraud Triangle

• Situational pressure includes personal or job-related stress that leads to dishonesty.
• Opportunity encompasses access to assets or information that controls assets.
• Ethics includes one's character and opposition to dishonesty.

Financial Losses Due to Fraud

• The Association of Certified Fraud Examiners (ACFE) estimated nearly $1 Trillion in fraud losses for 2008.
• The exact costs of fraud are hard to quantify.

Reasons for Inaccurate Fraud Quantifications

• Not all fraud is detected.
• Not all detected fraud is reported.
• Incomplete information is often gathered.
• Information isn't reported to management or authorities.
• Organizations opt against action against perpetrators.

Perpetrators of Fraud

• The ACFE studied factors that profile perpetrators, including position, collusion, gender, age, and education.

Categories of Fraud Schemes

• Fraudulent statements
• Corruption
• Asset misappropriation

Fraudulent Statements

• Fraudulent statements are typically management fraud.
• Financial misstatements must provide a personal benefit to be considered fraudulent statements.
• Statements used to cover up fraud don't classify.

Underlying Problems Contributing to Fraud

• Lack of auditor independence occurs when auditing firms perform non-accounting activities for clients.
• Lack of Director Independence is when board members have personal/business ties to the company.
• Questionable executive compensation schemes involving short-term stock options encourage strategies that boost stock prices at the expense of long-term health.
• Inappropriate accounting practices are common in financial statement fraud.

Corruption

• Corruption involves collusion with an outside party.
• The ACFE identifies bribery, illegal gratuities, conflict of interest, and economic extortion as the four types of corruption.

Types of Corruption

• Bribery aims to influence an official's lawful duties with things of value.
• Illegal gratuities involves giving, receiving, or offering something of value after an official act.
• Conflicts of interest occur when an employee acts in their own or a third party's self interest while performing their duties.
• Economic extortion uses force or threats to obtain something of value.

Asset Misappropriation

• These schemes involve assets being diverted for the perpetrator’s benefit.

Examples of Asset Misappropriation

• Skimming, mail room fraud, and cash larceny.
• Billing schemes, check tampering, and payroll fraud.
• Expense reimbursement and theft of cash.
• Non-cash and computer fraud.

Internal Control Systems

• Internal control systems comprise policies, practices, and procedures that help the organization achieve its objectives.
• The objectives of internal control are to safeguard assets, ensure accuracy, promote efficiency and policy compliances.

Modifying Assumptions

• Management is responsible for a system of internal control.
• Internal control costs should not outweigh benefits.
• Data processing methods to achieve objectives varies based on technology.
• Internal control systems have limitations.

Limitations of Internal Controls

• Error possibilities.
• Circumvention through collusion.
• Management override.
• Changing conditions that diminish effectiveness.

Exposures of Weak Internal Controls

• Destruction of an asset.
• Theft of an asset.
• Corruption of information.
• Disruption of systems.

Components of Internal Control

• Control environment sets the tone and awareness of control.
• Risk assessment identifies, analyzes, and manages risks.

Internal Control, Risk Assessment

• Changes in external environment.
• Risky foreign markets.
• Rapid growth can strain internal controls.
• Introduction of new product lines.
• Restructuring or downsizing.
• Changes in accounting policies.

Information and Communication

• AIS should produce quality information that identifies and records valid transactions.
• Timely information for classifying and reporting is important.
• Measure the value of transactions accurately
• Recording transactions occur accurately in the correct time period

Monitoring

• Monitoring assesses quality of internal control.
• It is assessed by separate or ongoing activities.

Control Activities

• These are policies and procedures to act on identified risks.

Categories of Control Activities

• Information Technology (IT) controls and physical controls.
• General and application controls fall under IT.

Physical Controls

• Transaction authorization, segregation of duties, and supervision.
• Maintaining accounting records.
• Access control.
• Independent verification.