Leonard J. Brooks, Paul Dunn - Business and Professional Ethics-Cengage Learning (2020).pdf

 Business and Professional ETHICS FOR DIRECTORS, EXECUTIVES & ACCOUNTANTS   9E LEONARD J. BROOKS PAUL DUNN Professor of Business...

 Business and Professional ETHICS FOR DIRECTORS, EXECUTIVES & ACCOUNTANTS   9E LEONARD J. BROOKS PAUL DUNN Professor of Business Ethics & Accounting Professor of Business Ethics Executive Director, Clarkson Centre Goodman School of Business for Business Ethics Brock University Joseph L. Rotman School of Management University of Toronto Australia Brazil Mexico Singapore United Kingdom United States Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  Business and Professional Ethics for © 2021, 2018 Cengage Learning, Inc. Directors, Executives & Accountants, Unless otherwise noted, all content is © Cengage. 9th edition WCN: 02-300 Leonard J. Brooks and Paul Dunn ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, Senior Vice President, Higher Education & except as permitted by U.S. copyright law, without the prior written Skills Product: Erin Joyner permission of the copyright owner. Product Director: Jason Fremder Product Manager: Jonathan Gross For product information and technology assistance, contact us at Cengage Customer & Sales Support, 1-800-354-9706 Content Manager: Aiyana Moore or support.cengage.com. 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To learn more about Cengage platforms and services, register or access your online learning solution, or purchase materials for your course, visit www.cengage.com. Printed in the United States of America Print Number: 01   Print Year: 2020 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  DEDICATION Business and Professional Ethics for Directors, Executives & Accountants is focused on deepening the understanding of how best to incorporate ethical values into governance, strategies, and actions to the benefit of us all. Our preparation of the Ninth Edition has been enriched by the contributions of many, but none more than our wives and families who have supported and encouraged us and to whom we dedicate this work. It is with great pride, thankfulness, and love that we acknowledge Jean and Kathy and our growing families. Leonard J. Brooks, FCPA, FCA Paul Dunn, CPA, CA Toronto, Canada December 2019 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  ABOUT THE AUTHORS Leonard J. Brooks is Professor of Business Ethics & Accounting at the Rotman School of Management of the University of Toronto. He is the Executive Director of the Rotman School’s Clarkson Centre for Business Ethics, Director of the University’s Professional Accounting Centre, and Director of its Master of Forensic Accounting Program (formerly the Diploma in Investigative & Forensic Accounting Program) at the University’s Institute for Management & Innovation. Professor Brooks served for fourteen years on the Editorial Board of the Journal of Business Ethics and continues to serve as a reviewer for that as well as other journals. He has published articles on ethics issues in the Journal of Business Ethics, Accounting Orga- nizations and Society, and Business & Society and has authored or coauthored/edited the research monograph Canadian Corporate Social Performance and books or publications entitled Business & Professional Ethics for Accountants, 2e; Principles of Stakeholder Man- agement: The Clarkson Principles; and Ethics & Governance: Developing and Maintaining an Ethical Corporate Culture, 4e. Before joining the University of Toronto, Professor Brooks obtained his Chartered Accountant (C.A.) designation in Canada and subsequently became an audit manager and Director of Manpower for Touche Ross & Co. (now Deloitte LLP) in Toronto. He has served as a member, then Chairman, of the CAs’ national Board of Examiners, and Chairman of their national Syllabus Committee. Professor Brooks became a Fellow of the Institute of Chartered Accountants of Ontario in 1982. He became a Chartered Professional Accountant (CPA) and a Fellow of the Chartered Professional Accountants (FCPA) of Ontario in 2012. Paul Dunn is a Professor of Business Ethics at the Goodman School of Business, Brock University. Dr. Dunn has a doctorate in accounting from Boston University as well as two degrees in philosophy from the University of Toronto. He is a CPA who worked in down- town Toronto with Ernst & Young (as a chartered accountant), the Canadian Imperial Bank of Commerce (in the finance division), as well as in the private sector (in controllership). Professor Dunn’s research focuses on ethics, corporate governance, and corporate social responsibility. His research has appeared in a variety of scholarly journals, including the Journal of Business Ethics, the Journal of Management, Business & Society, and Business Ethics Quarterly. He is an Associate Editor for Business and Society Review and sits on the editorial boards of the Journal of Business Ethics, Business & Society, as well as the Journal of Management and Governance. The media in both Canada and internationally interview Paul Dunn regularly. iv Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  CONTENTS PREFACE xiii OVERVIEW OF THE BOOK xxiv CHAPTER 1 ETHICS EXPECTATIONS 1 The Ethics Environment for Business: The Battle Selling Only Sugary Drinks 36 for Credibility, Reputation, & Competitive Buying and Selling Blood 37 Pedophile Priests in the Catholic Church 38 Advantage 2 Sexual Abuse by a Penn State Football Coach 39 Environmental Concerns 2 Moral Sensitivity 4 Advertising & Sales Promotion Cases Bad Judgments & Activist Stakeholders 5 Tiger Woods: “Winning Takes Care of Everything” 39 Economic & Competitive Pressures 6 Pepsi’s iPhone App Stereotypes Women 40 Financial Scandals: The Expectations Gap & Should Porn Be Sold by Cell Phone Companies? 41 the Credibility Gap 7 Virgin Mobile’s Strip2Clothe Campaign: Exploitive, Risqué, Governance Failures & Risk Assessment 8 and Worthwhile? 42 Increased Accountability & Transparency Desired 8 Cases Involving Financial Transactions Synergy among Factors & Institutional Reinforcement 9 Outcomes 10 Goldman Sachs and the Greek Veil 43 Martha Stewart’s Lost Reputation 44 New Expectations for Business 11 New Mandate for Business 11 Cases Involving the Control of Information New Governance & Accountability Frameworks 13 Google versus China 49 Reinforced Fiduciary Role for Professional Accountants 14 China’s Tainted Baby Milk Powder: Rumored Control of Online News 50 Responses & Developments 15 Emerging Governance & Stakeholder Accountability Cases Concerning the Environment Models 15 Nestlé Bottles Water in a California Drought 52 Management Based on Values, Reputation, & Risks 20 Bhopal–Union Carbide 53 Accountability 23 Texaco: The Ecuador Issue 56 Ethical Behavior & Developments in Business Ethics 24 Product Safety Cases The Ethics Environment for Professional The Right to Be Informed? The Link between Talcum Powder Accountants 27 and Cervical Cancer 58 Role & Conduct 27 Valeant Pharmaceuticals vs. Coca Cola—Which Business Governance 28 Model Is Worse: Price Gouging or Fostering Obesity & Services Offered 29 Diabetes? 60 The Betaseron Decision (A) 62 Managing Ethics Risks & Opportunities 29 Magnetic Toys Can Hurt 63 Developing a Culture of Integrity 29 Bausch & Lomb’s Hazardous Contact Lens Cleaner 64 Corporate Governance 30 Accounting & Auditing Cases Questions 32 Where Were the Accountants? 65 Reading Insights 33 To Resign or Serve? 66 References 33 READING Case Insights 34 The WhistleBlower: Patriot or Bounty Hunter? 67 ETHICS CASES: Cases Involving Improper Behavior v Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. vi CONTENTS CHAPTER 2 ETHICS & GOVERNANCE SCANDALS 76 Ethics & Governance: A Time Line of Important New Emphasis on Individual Accountability Events 77 for Corporate Wrongdoing 107 Panama Papers & Paradise Papers Eliminate Secrecy on Ethics & Governance: The Early Developments prior to Offshore Tax Evasion 107 1970 77 Unethical Bank Cultures Produce Scandals 108 Ethics & Governance: 1970–1990 79 #MeToo Movement Reaches a Tipping Point 109 Harmful Products Draw Huge Settlements Ethics & Governance: The Modern and Change Perspectives 109 Era—1990 to the Present 79 Accounting Crises Lead to Reimagination of Professional Significant Ethics & Governance Scandals & Accountant’s Role 110 Events 82 U.S. Business Roundtable Statement Signals Acceptance Enron—A Failure of the Board of Directors 82 of Stakeholder Interests 111 Arthur Andersen—An Organizational Culture Gone Signs of Ethical Collapse 112 Awry 84 WorldCom—Power in the Hands of One Man 85 Ethics & Governance: Trends 112 Crisis of Confidence 86 Ethics & Governance: Timetables of Sarbanes-Oxley Act—Closing the Barn Door 88 Important Events, 1929–2019 113 Tax Shelters—Not in the Public Interest 89 Subprime Mortgage Meltdown—Greed without Due Useful Videos & Films 114 Diligence 91 Questions 115 Dodd-Frank Wall Street Reform and Consumer Protection Case Insights 116 Act 94 Bernard Madoff—If It’s Too Good to Be True 95 ETHICS CASES: Public Disillusionment: The Occupy Movement 96 Enron’s Questionable Transactions 117 Shareholder Disillusionment: Shareholder Arthur Andersen’s Troubles 122 Resolutions 97 WorldCom: The Final Catalyst 130 The LIBOR Scandal: How Banks Manipulated Bernie Madoff Scandal—The King of Ponzi Schemes 136 a Benchmark Interest Rate 98 Wal-Mart Bribery in Mexico 146 Bribery Attracts Prosecutions and Huge Fines 103 LIBOR Manipulations Cause Widespread Impacts 148 General Motors Ignores Obvious Ignition Faults 150 Automaker’s Sins Come Home to Roost 103 VW Cheats on Emissions Tests 152 Drugmakers Raise Prices, Gouging Patients 106 Deutsche Bank—A Cultural Disaster 154 CHAPTER 3 ETHICAL BEHAVIOR—PHILOSOPHERS’ CONTRIBUTIONS 158 Ethics & Moral Codes 159 Questions 183 Ethics & Business 162 Case Insights 184 Self-Interest & Economics 163 Useful Video & Film 184 Ethics, Business, & the Law 165 References 185 Major Ethical Theories Useful in Resolving Ethical ETHICS CASES: Dilemmas 166 Cases Involving Improper Behavior Teleology: Utilitarianism & Consequentialism—Impact An Illustration of Ethical Decision Making 185 Analysis 166 Spy versus Spy: Corporate Espionage in the Canadian Airline Deontological Ethics—Motivation for Behavior 172 Industry 188 Justice & Fairness—Examining Art Forgeries: Is Deceiving Art Experts Unethical? 190 the Balance 175 Gender Discrimination at IKEA 190 Virtue Ethics—Analysis of the Virtue Deciding Who Receives the Swine Flu Vaccine 191 Expected 180 Insurance and Genetically Inherited Diseases 192 Terrorist Payments 193 Moral Imagination 183 The Case of Cesar Correia 194 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  CONTENTSvii CHAPTER 4 PRACTICAL ETHICAL DECISION MAKING 196 Introduction 196 Common Ethics Decision-Making Pitfalls 221 Motivating Developments for Ethical Learning 197 A Comprehensive Ethical Decision-Making Framework 223 Ethical Decision Making Framework—An Summary of Steps for an Ethical Decision 223 Overview 198 Conclusion 225 Philosophical Approaches—An Overview: Consequentialism (Utilitarianism), Deontology, & Questions 225 Virtue Ethics 200 References 226 Consequentialism, Utilitarianism, or Teleology 200 Illustrative Applications & Case Insights 227 Deontology 201 Virtue Ethics 203 AN ILLUSTRATION OF COMPREHENSIVE ETHICAL DECISION MAKING Sniff Tests & Common Heuristics—Preliminary Dealing with Disappointed Apple iPhone Customers Case 228 Tests of Ethicality 205 ILLUSTRATIVE APPLICATION OF Stakeholder Impact Analysis—Comprehensive STAKEHOLDER IMPACT ANALYSIS Tool for Assessing Decisions & Actions 206 Bribery or Opportunity in China Case 229 Overview 206 Proposed Audit Adjustment Case—Castle Fundamental Interests of Stakeholders 207 Manufacturing Inc. 232 Measurement of Quantifiable Impacts 209 When Does an “Aggressive Accounting” Choice Become Assessment of Nonquantifiable Impacts 213 Fraudulent? 237 Stakeholder Impact Analysis—Modified Traditional ETHICS CASES: Decision-Making Approaches 216 Concussions in the NFL 238 BP’s Gulf Oil Spill Costs 239 Integrating Philosophical & Stakeholder Impact Tylenol Recalls (2010): It’s Still About Reputation 243 Analysis Approaches 219 Vioxx Decisions—Were They Ethical? 245 Just Make the Numbers! 248 Other Ethics Decision-Making Issues 220 Smokers Are Good for the Economy—Really 248 Commons Problems 220 Ford Pinto 250 Developing a More Ethical Action Using Moral The Kardell Paper Co. 251 Imagination 221 CHAPTER 5  ORPORATE ETHICAL GOVERNANCE & C ACCOUNTABILITY 254 Modern Governance & Accountability Framework— Compelling Evidence for the Development of an Ethical To Shareholders & Other Stakeholders 255 Corporate Culture 279 New Expectations—New Framework to Restore Developing, Implementing, & Managing an Ethical Credibility 255 Corporate Culture 282 Corporate Governance Overview 256 Corporate Codes of Conduct 288 Accountability to Shareholders or Stakeholders? 260 Ethical Leadership 297 The Shareholder Value Myth 262 Corporate Psychopaths 302 Governance for Broad Stakeholder Accountability 263 Director & Officer Liability 302 Guidance Mechanisms—Ethical Culture & Code of Public Accountability Benchmarks 305 Conduct 268 Conclusion—Toward a Culture of Integrity 306 Threats to Good Governance & Accountability 269 Questions 306 Misunderstanding Objectives & Fiduciary Duty 269 Failure to Identify & Manage Ethics Risks 270 Case Insights 307 Conflicts of Interest 272 Reading Insights 310 Key Elements of Corporate Governance & References 310 Accountability 279 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. viii CONTENTS ETHICS CASES: Cases on Fraudulent & Questionable Financial Reporting Cases on Ethical Corporate Culture Satyam Computer Services—The Enron of India 336 Hospital Governance Challenges 312 Nortel Networks’ Audit Committee Was in the Dark 338 Siemens’ Bribery Scandal 313 Criminal Charges for Fraud Dismissed Cases on Ethical Leadership Adelphia—Really the Rigas Family Piggy Bank 348 Salary Equality at Gravity Payments 315 Tyco—Looting Executive Style 352 Merck and River Blindness 316 HealthSouth—Can Five CFOs Be Wrong? 356 Lululemon’s Questionable Leadership 317 Royal Ahold—A Dutch Company with U.S.-Style Incentives 361 The Ethics of Bankruptcy: Jetsgo Corporation 364 Cases on Bribery Stock Market Cases SNC-Lavalin Missing Funds Topples CEO & Triggers Bribery Investigation 318 Société Générale’s Rogue Trader 366 Rio Tinto’s Bribes in China 320 Galleon’s Insider Trading Network 368 Daimler’s Settles U.S. Bribery Case for $185 Million 322 KPMG Partner Shares Confidential Information HP Bribery for Russian Contract with Antibribery Prosecutor’s with a Friend—located in Chapter 6 Office 324 Conflicts of Interest on Wall Street 371 Loyalty, but to Whom? 373 Cases on Corporate Governance & Managerial Opportunism Bankers Trust: Learning from Derivatives 376 Spying on HP Directors 325 Barings Bank: Rogue Trader 379 Lord Conrad Black’s Fiduciary Duty? 328 Cases on Product Safety Manipulation of MCI’s Allowance for Doubtful Dow Corning Silicone Breast Implants 382 Accounts 332 Ford/Firestone Tire Recall 384 Stock Options and Gifts of Publicly Traded Shares 333 The Ethics of Repricing and Backdating Employee Stock APPENDIX Options 335 Appendix A: Alternative Governance Theories 395 CHAPTER 6  ROFESSIONAL ACCOUNTING IN THE PUBLIC P INTEREST 400 Professionalism for Accountants 401 Conceptual Framework for Assessing Threats to Compliance 440 Professional Accounting’s Traditional Role 402 Conflict-of-Interest Threats to Independence 442 Historic Shortfalls in Meeting Professional Conflicts of Interest Affecting Services Expectations 403 Offered 446 Professional Accounting and the Public Laws & Jurisprudence 462 Interest 404 Moral Courage Is Vital to Professional Accounting: Public Expectations Control Reputation 404 Globalization Heightens the Requirement 464 Dominance of Ethical Values Rather Than Accounting or Audit Techniques 408 When Codes & Laws Do Not Help 465 New NOCLAR Standards 412 Broadening Role for Professional Accountants 465 Guidance for Professional Accountants Discovering Actual Conclusion 466 or Potential NOCLAR Activities 414 NOCLAR Requirements for Professional Accountants Questions 467 Providing Audit or Nonaudit Services 416 Reading Insights 468 NOCLAR Responsibilities of Professional Accountants in Case Insights 468 Business (PAIB) 416 NOCLAR Implementation Issues 417 References 472 Implications for Services Offered 417 ETHICS CASES: Assurance & Other Services 417 Famous Cases Judgment & Values 421 Sources of Ethical Guidance 422 Carillion Bankruptcy: A Nightmare That Challenged the Foundations of the U.K. Accounting Profession 473 Professional Codes of Conduct 424 Parmalat–Europe’s Enron 478 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  CONTENTSix Arthur Andersen, Enron, and WorldCom cases—located Accounting & Auditing Dilemmas in Chapter 2 Sino-Forest Fraud? Audit Challenges in China 501 Tyco, HealthSouth and Royal Ahold cases—located Massive Acquisition Write-Downs in the Mining Industry 506 in Chapter 5 Accounting Rule Changes Increase Apple Computer’s Lehman Brothers case—located in Chapter 8 Revenue 508 Sunbeam and Waste Management cases— The Impact of International GAAP on Earnings 509 located in the BPE Digital Resources Auditor’s Dilemma 510 Professional & Fiduciary Duty Cases Management Choice 512 To Qualify or Not? 512 NOCLAR Solutions to Toshiba’s Accounting Scandals & Team Player Problems 515 Confrontations with Auditors 485 Minimal Disclosure 515 KPMG’s Ethical Red Flags—Advance PCAOB Information and Opinion Shopping 516 Cheating on Ethics Exams 487 Lowballing a Fee Quotation 517 KPMG Partner Shares Confidential Information with a Friend 488 Fundamental Accounting and Auditing Issues Cases Livent—When Maria, When? 489 Societal Concerns 517 The Lang Michener Affair 490 Economic Realities or GAAP 518 Wanda Liczyk’s Conflicts of Interest 494 Multidisciplinary Practices—Ethical Challenges 518 Strategic Roles 496 Locker Room Talk 496 Tax and Regulatory Cases Advice for Sam and Ruby 497 Multinationals and Tax Planning 519 Biker Nightmare 498 KPMG’s Questionable Tax Shelters 520 Budget Conflict 498 Italian Tax Mores 522 An Exotic Professional Accountant? 499 Tax Return Complications 524 Freebie Services for Staff 499 Marketing Aggressive Tax Shelters 525 Summer Camp Holdback 499 Providing Tax Advice 526 Theft Reimbursement, Twice 500 Risk Management of Taxes Payable—Is It Ethical? 528 CHAPTER 7 MANAGING ETHICS RISKS & OPPORTUNITIES 529 Ethics Risks & Opportunities Identification & Questions 590 Assessment 529 Case Insights 591 Enterprise Risk Management Must Include Ethics Risks & Opportunities 529 Reading Insights 593 Ethics Risk Review or Audit—A Comprehensive References 593 Approach 535 ETHICS CASES: Searching for Specific Ethics Risks 537 CSR Cases—Environmental Issues Ethics Risks & Opportunities: Management & Mitigation 540 Harry Potter and the Green Brigade 595 The Carbon Footprint of British Airways 596 Ethics Risks & Opportunities: Effective Stakeholder The Pollution Caused by Cruise Ships 597 Relations 540 Workplace Ethics Cases—Discrimination and Abuse Ethics Risks & Opportunties: Stakeholder Pedophile Priests in the Catholic Church—located in Chapter 1 Accountability 542 Sexual Abuse by a Penn State Football Coach— Sustainability, Corporate Social Responsibility, & located in Chapter 1 Corporate Citizenship 542 Texaco’s Jelly Beans 599 Ethics Risks & Opportunities: Key Risk Issues & Gender Discrimination at Dell Inc. 604 Novartis’ $2501 Million Gender Discrimination Case 605 Tools 558 Downsize or Bonus Allocation Decisions 606 Workplace Ethics 558 Whistleblower Programs & Ethics Inquiry Services 566 Workplace Ethics Cases—Spying Fraud & White-Collar Crime 568 Barclays Bank: How Not to Deal with Whistleblowing 607 Bribery & International Operations 573 Crisis Management 585 Workplace Ethics Cases—White-Collar Crime Danske Bank’s Money-Laundering Scandal 608 Conclusion 589 QuadrigaCX—A Cryptocurrency Fiasco 610 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. x CONTENTS Walt Pavlo’s MCI Scams/Frauds 613 Risk & Crisis Management Cases Bribery & International Operations Cases BP’s Gulf Oil Spill Risk Management 616 BP’s Corporate Culture 620 Jail and a German Subcontractor (names are fictitious) 615 Toyota’s Recall Problems 621 AIDS Medication in South Africa 616 Digoxin Overdose—The Need for Skepticism, Courage, and The following bribery cases are located in Chapter 5: Persistence 625 Siemens’ Bribery Scandal The Exxon Valdez 627 Wal-Mart Bribery in Mexico The Brent Spar Decommissioning Disaster 630 SNC Lavalin Missing Funds Topples CEO & Crisis at Wind River Energy Inc. 632 Triggers Bribery Investigation Rio Tinto’s Bribes in China APPENDIX Daimler Settles U.S. Bribery Case for $185 Million Appendix A: Ethics Audit Program Annual Audit Questions 635 Bribery for Russian Contract with Anti-Bribery Prosecutor’s Office CHAPTER 8 SUBPRIME LENDING FIASCO—ETHICS ISSUES 637 The Economic Train Wreck—A Global Lack of Regulation & Sound Decision Making 661 Disaster 637 Are Mark-to-Market (M2M) Accounting Standards to Blame? 662 Stages of the Subprime Lending Fiasco 638 The Ultimate Risk Bearers 664 How Did the Subprime Lending Crisis Happen? 640 Cynicism 664 Subprime Lending Developments 641 Ethics Lessons 666 Transfer of Risk & the Liquidity Freeze 643 Contributions of Fannie Mae & Freddie Mac 644 Questions 667 The Conflicted Credit-Rating Sham 645 Case Insights 668 Regulators Looked in the Wrong Direction 646 Special Purpose Vehicles—Key to the Crisis 646 References 670 Unlimited Toxic Risk—Credit Default Swaps, ETHICS CASES: Naked & Otherwise 649 Questionable Values Produce Resignation at Goldman Crisis, Bankruptcy, Bailouts, & New Regulations 649 Sachs 671 Worldwide Contagion 652 Naked Short Selling—Overstock.com Lawsuit against Goldman Subsequent Events 654 Sachs & Merrill Lynch 672 Lehman Brothers Repo 105 Manipulation 673 Ethics Issues—The Subprime Lending Fiasco 658 Goldman Sachs Conflicts: Guilty or Not? 685 Greed, Incompetence, Dishonesty, Conflicts of Interest, Mark-to-Market (M2M) Accounting and the Demise of AIG 692 Non-transparency, Lack of Moral Courage, & Poor Risk Subprime Lending—Greed, Faith, and Disaster 694 Management 658 Moral Courage: Toronto-Dominion Bank CEO Refuses to Invest Corporate Psychopaths—Potential Role in the Subprime in High-Risk Asset-Backed Commercial Paper 696 Lending Crisis 659 The Ethics of AIG’s Commission Sales 697 INDEX 699 BPE DIGITAL RESOURCES: Digital Resources are available for Business & Professional Ethics including readings and references noted in the margin of this book, as well as cases and a chapter from earlier editions. Visit www.cengage.com for access. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  CONTENTSxi DIGITAL RESOURCES—TABLE OF CONTENTS Chapter/ Location Resource 4 Leonard J. Brooks, “Sniff Tests,” Corporate Ethics Monitor 7, no. 5 (1995): 65. L. J. Brooks, “Cost–Benefit Analysis,” CAmagazine, October 1979, 53–57. 5, 6 International Federation of Accountants (IFAC) Code of Ethics for Profes- sional Accountants, November 2001 6 READINGS A Lawyer’s Perspective on an Accountant’s Professional Obligations The Liability Crisis in the United States: Impact on the Accounting Profession—A Statement of Position Trends in the Legal Liability of Accountants and Auditors and Legal Defenses Available CASES REFERRED TO IN THE 9TH EDITION Enron’s Questionable Transactions: Detailed Case Sunbeam Corporation and Chainsaw Al Waste Management, Inc. CASES REFERRED TO IN EARLIER EDITIONS A Minority-Controlling Shareholder Allan Eagleson: The Eagle Has Landed Bausch & Lomb’s Hazardous Contact Lens Cleaner Chris Neary’s Overcommitment to His Business Lawrence Salander the Bernie Madoff of the Art World Maple Leaf Gardens Shenanigans Philip Services Corp... Into the Dumper Ritchies Auctioneers and the Ethics of Auctions RT Capital Virgin Mobiles Strip2Clothe Campaign DIGITAL RESOURCES FROM EARLIER EDITIONS The Credibility Crisis—Enron, WorldCom, & SOX Chapter 9, 6th edition Chapter 9 text Key reports and letters: The Powers Report by a specially formed subcommittee of Enron’s Board, February 1, 2002 (Powers) The Role of the Board of Directors in Enron’s Collapse by the U.S. Senate’s Permanent Subcommittee on Investigations—July 8, 2002 (Senate) Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. xii CONTENTS The Accounting Treatment of Prepays by Robert Roach, Counsel and Chief Investigator, U.S. Senate’s Permanent Subcommittee on Investigations—July 27, 2002 (Roach) Sherron Watkins letter, sent on August 15, 2001, and her Senate Sub- committee testimony of February 14, 2002 Sarbanes-Oxley Act of 2002 Governance Reports and guidance SEC Reports, Press Releases, and Complaints, regarding Enron, Arthur Andersen, WorldCom, and Sunbeam Corporation Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  PREFACE CHALLENGES & OPPORTUNITIES Expectations for appropriate business and professional accounting behavior have changed dramatically. Corporations now face an era of heightened accountability beyond shareholders to stakeholders who are intently interested in how corporations achieve their objectives, not just what they achieve. It is now recognized that corporate accountability has shifted from accountability only to shareholders to accountability to stakeholders including shareholders. The challenge is to make a profit ethically while respecting the interests of others including the environment, human rights, and contributing positively to society. Opportunities abound for those who face these challenges successfully. More is also expected of professional accountants, who are expected more than ever to serve society’s best interests in increasingly complex and challenging business environments. The era of heightened accountability has been forced by stakeholders who have rec- ognized that errant corporate directors and managers and professional accountants have failed the public interests with catastrophic and lasting impacts. There is a broad under- standing that the last three major negative impacts on the world economy were ethical fail- ures, including the following: The crisis of confidence in corporate governance and credibility in reporting caused by the 2002 failures of Enron, Arthur Andersen, and WorldCom, leading to the crash of the stock market and the introduction of the Sarbanes-Oxley Act of 2002 (SOX) The Subprime Lending Crisis of 2007–2009 , where greed and unethical behavior led to a crash of the U.S. housing market and the collapse of investment values around the world and the enactment of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The LIBOR rate manipulation scandal of 2012 in which the underpinning basis for interest rates was knowingly manipulated for the benefit of a few banks and their traders In addition, there have been many other ethical failures, such as the Madoff Ponzi scheme; damage to the environment and to vulnerable members of society that have caused serious damage to the reputations of individuals, organizations, or professionals; and an understanding that higher expectations were warranted and that lower levels of performance were to be penalized. Farsighted businesspeople and professional accountants took note and began to systematically search for ethics risks and manage to prevent those risks from damaging their reputations and their ability to reach their objectives. This book presents an examination of how businesspeople and professional accoun- tants can prepare themselves, their colleagues, and their organizations to identify import- ant ethics challenges and opportunities and meet the heightened performance expectations they face. To succeed in the future, businesspeople and professional accountants will need to understand the key historical developments that have given rise to these heightened expectations and the techniques that are available and developing to shape future perfor- mance. There is now absolutely no excuse for a company to make ethical errors similar to those made by Wells Fargo (unethical incentives), VW (cheating on emissions tests), or Fox News (ignoring sexual abuse). xiii Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. xiv PREFACE  The demise of Enron, Arthur Andersen, and WorldCom triggered SOX. The subprime lending scandal in 2007 led to the worldwide recession that has so significantly negatively affected economies, jobs, and the lives of us all. These events were ethical failures that could have been prevented. Unchecked until too late, they subsequently galvanized reforms in the accountability and governance of both corporations and professional accounting that have influenced business and professional ethics around the world. Undoubtedly, they will con- tinue to bring new challenges and opportunities for directors, executives, managers, and professional accountants. The reforms in accountability and governance frameworks have recognized that cor- porations and professional accountants have become increasingly more broadly account- able than previously understood. The crisis of corporate governance and reporting credibility that Enron began, Arthur Andersen fostered, WorldCom capped, and SOX sought to rem- edy heightened the awareness that corporations and the accounting profession must have the support of many stakeholder groups to achieve their strategic objectives. Following very quickly, the subprime lending fiasco from 2007 to 2009 further exacerbated the cri- sis of confidence by sensitizing the public and adding to ethical awareness and generating higher expectations for ethical behavior in order to sustain stakeholder support. That support requires trust. Trust is based on the expectation that the corporation— really its board, executives, employees, and agents—and professional accountant will do the right thing and that their actions will respect the interests of the stakeholder groups. Earning and maintaining that trust requires changing the strategy, risk management, plan- ning, operations, and decision making of the corporation to take account of the interests and expectations of stakeholder groups in addition to shareholders. A new accountability framework is required that focuses on indicators of performance related to stakeholder expectations for both internal and external reporting. Governance must focus on this new, broader accountability framework in order to ensure that stakeholder trust objectives are met. Such a change will not happen by itself, and directors are in danger of not fulfilling their expectations to shareholders for risk man- agement and due diligence if they ignore this duty. Some directors have understood the value of an excellent reputation and have been including risks to reputation in their risk management programs. Now that the linkage among ethics, reputation, and trust is clear and better understood, it is vital for corporations to upgrade their accountability and gov- ernance frameworks to ensure continued support. Shareholders and other stakeholders have come to expect more than they did pre-SOX—and the bar continues to rise. Professional accountants can and should provide a critical facilitating element in the trust-oriented accountability and governance system. First, professional accountants can be important agents for ensuring trust. They are expected to serve in the public interest and must do so to preserve the trust placed in them by a society that expects them to behave as professionals. This expectation, which applies to professional accountants in public prac- tice as well as those employed by corporations, requires a rededication to their role as a trusted fiduciary. Second, professional accountants are well placed to understand the role of trust in internal control and accountability frameworks and in the governance frame- works that provide direction and oversight to corporate activities. Third, good professional accountants are expected to display a level of professional skepticism and duty that should enable them to recognize the red flags of potential problems and report or remediate them. Perhaps most important, these new governance and ethics expectations have reached the academic launching pads for new directors, executives, and professional accountants. The interest in newly created directors’ governance education programs is startling. In 2004, the accreditation body for business schools worldwide published an Ethics Edu- cation Task Force Report that called for business students to be educated about (1) the Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  PREFACExv responsibility of business in society, (2) ethical leadership, (3) ethical decision making, and (4) corporate governance and ethics.1 Moreover, many jurisdictions are requiring compul- sory ethics courses for accounting students before they are considered ready to write their qualifying exams for professional accounting designation. Accordingly, ethics and gover- nance coverage is penetrating the curricula of far more business schools than in the past— which bodes well for the future. Professional accounting bodies, stung by recent scandals, have also embraced this new era of ethical accountability by introducing a new international code of ethics that includes NOCLAR standards2 that, when adopted worldwide, will fundamentally change the role of professional accountants. These new standards will require a professional accountant who discovers or suspects that his or her employer or client is not complying with laws or regulations to report this internally and then externally if no or insufficient action is taken. Because silence is not an option, there will be less chance of ethics problems staying secret. Consequently, it behooves companies to look for ethics risks systematically during their risk management programs. The new code of ethics also stresses that the primary purpose of professional accountants is to serve the public interest, and as a result, many professional accounting bodies have initiated compulsory ethics-related, professional development requirements for their graduates. Understanding these trust expectations and the interrelationship to ethics and gov- ernance will resolve challenges and present opportunities for directors, executives, and professional accountants. It will facilitate the assessment of ethics risks, the protection of reputation, and the development of management safeguards such as a strong culture of integrity. More important, it will provide the essential foundation for ensuring the support of stakeholders for corporations and firms in the future. PURPOSE OF THE BOOK Business & Professional Ethics for Directors, Executives & Accountants provides a com- prehensive background for understanding the crisis of credibility that business and the accounting profession now face and what can be done to restore the trust necessary for them to reach their strategic goals successfully. Business and the accounting profession are now in an era of risk management because numerous scandals have undermined the credibility and reputation of corporations, firms, directors, executives, and accountants. Businesses and professionals cannot reach their strategic goals optimally in the medium and longer terms unless the ethics risks causing these scandals are recognized, avoided, mitigated, and monitored continuously. Gover- nance systems must include ethical guidance, and decision making must consider the value systems that stakeholder groups respect; otherwise, stakeholders will not provide essential support because the corporate culture is unlikely to be a culture of integrity. Without a cor- porate culture of integrity, corporate directors and auditors cannot do their jobs effectively. Understanding how past scandals have led to the current era of governance and ethics risk management is essential so that past disasters can be avoided. 1 The Association to Advance Collegiate Schools of Business, AACSB Ethics Education Task Force Report, June 2004, available at https://www​.aacsb.edu/~/media/AACSB/Publications/research-reports/ethics-education.ashx 2 The NOCLAR standards that are included in the 2018 IESBA International Code of Ethics for Professional Accoun- tants are discussed in Chapter 6. Over 170 professional accounting bodies worldwide, including the AICPA, CPA Canada, and ICAEW, are members of the International Federation of Accountants (IFAC) and have pledged to harmonize their local codes to the IESBA Code in the near future. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. xvi PREFACE Students, executives, and board members must learn how to use ethical strategies, make ethical decisions, and integrate the latest information on ethics, governance scandals, legal liability, and professional accounting and auditing issues. They must understand why developing an ethical corporate culture is essential to maintaining stakeholder support and for auditors to audit financial statements. To keep learning interesting and to under- score the importance of ethical issues, this edition provides more than 140 cases, including classic frauds, bankruptcies, loss of reputation, and unprofessional practices, that provide excellent opportunities for developing an understanding of soft skills, including communi- cations, persuasion, presentation, leadership, and a global mindset. The crisis of corporate reporting credibility became so severe in mid-2002 that drastic measures were required to restore that credibility and relieve the gridlock that froze capi- tal markets and dampened economies around the world. In fact, the financial disasters in 2002 accelerated and crystallized the impact of pressures for enhanced corporate account- ability and a supportive governance framework that had been growing for years. As gov- ernance reform based on sound ethics takes hold around the world, there is an increasing need to understand the historical precursors involved, the responsibilities expected, and the techniques available for the satisfaction of those expectations. Telling the story of ongoing pressures for more trusted governance and of the con- tributions of key financial scandals is important to the development of an appropriate understanding of the post-SOX world for directors, executives, and accountants, and of the heightened ethical expectations arising from the subprime lending crisis. Ethical failures have cost us all dearly. In response, governance has recently incorporated the need for a risk management process—a process that must now be broadened to involve awareness of factors that can erode the support of stakeholder groups. The reputation of corporations is recognized as being connected with the degree to which stakeholders trust that corporations will do the right thing. In other words, there is now a concern for both what a corporation does and how it is done. At certain times in the past, the emphasis was so strongly on achieving profit that little attention was given to how the profit was earned. Now that the support of stakeholders is recognized as critical to success, an important second objective of the book is to provide an understanding how to create a corporate culture of integrity—one that builds stakeholders’ ethical expectations into cor- porate behavior, accountability, and governance. Extending this discussion to the new era for professional accountants and reviewing their potential roles is a third objective. Directors, executives, and accountants need to understand how to make ethical deci- sions they can defend to stakeholders. Codes of conduct cannot cover all situations, so organizational cultures need to be developed and decision processes utilized that are based on sound ethical decision-making frameworks. Business and Professional Ethics for Direc- tors, Executives & Accountants covers these topics as well as the development of an eth- ics risk management process, strategies for dealing with and reporting to stakeholders, and strategies for ensuring ethical behavior in the workplace and during the management of crises. In a nutshell, Business and Professional Ethics for Directors, Executives & ­Accountants examines the background and nature of the heightened stakeholder-accountability era of corporate and professional accountability and governance, and provides insights into the development of sound patterns of behavior on the part of directors, executives, and accoun- tants. Successful management of ethical risks and the development of ethical competitive advantages depend upon the mastery of the subjects discussed. Professional accountants must understand the issues covered as a foundation for the fulfillment of their role as fidu- ciaries and experts in accountability and governance. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.  PREFACExvii APPLICABILITY Business and Professional Ethics for Directors, Executives & Accountants is intended as a