ACTG 1P11 Lecture Notes - Lecture 10: Professional Accounting Body, Bernard Madoff, List Of The Shield Episodes
13 Dec 2016
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Chapter 4: Ethics/Internal controls and Petty Cash
Why care ethics important?
• Public confidence in the accounting profession is highly important
o unethical behaviour erodes that public confidence
o accounting fraud scandals erode public confidence
• external auditor reports - audit report or review report - adds credibility to the financial statements
o reduces the information risk to users
o lower risk - lower interest rate
• If auditor's reports cannot be relied upon, it increases the cost of capital, affecting business
decisions
Promoting Ethical Behaviour:
• Members of a professional accounting body are required to adhere to a code of conduct
o Similar to a code of ethics - dictates standards of behaviour expected of members of the
profession
o key imperative: "a licensee or student shall conduct themselves at all times in a nammer
that will maintain the good reputation of public accountants and their ability to serve the
public interest" (CPA Ontario, Rules of Professional Conduct, Section 11 of Standards of
the Public Accountants Council For the Province of Ontario).
• In industry, businesses encourage ethical behaviour by adopting a Code of Ethics
o Defines standards of behaviour that all members of the organization are expected to
follow
o To be effective, it must:
❖ Be communicated to all members
❖ Fully supported by top management (known as the "tone at the top")
❖ enforced
o a system should be established to allow employees to anonymously report unethical
behaviour ("whistleblower") without fear of reprisal.
Ethics Applied to Accounting:
• in the previous section for this course, we outlined the need for adjusting entries to ensure the
proper amount of revenue and expenses (and by consequence, the proper amount of assents and
liabilities) is captured in our financial statements
• how can accruals and deferrals be used unethically to manipulate the reported amount of net
income?
o Delay/ omit recording accrual expenses (net income increases)
o Advance/add recording of accrued revenues (net income increase)
o Delay/omit reposting prepaid expenses to expenses (net income increase)
o Advance/add reposting of unearned revenue as revenue (net income increase)
find more resources at oneclass.com
find more resources at oneclass.com
What is Fraud:
• Done to make financial statements to seem more desirable than they should
• inventory shrinkage: theft of inventory goods causing the company a large loss
• Cheque tampering - manipulating or misdirecting cheques
• Cash register schemes - put money in pocket and not in cash register
• Expense report falsification - someone else using expenses upon the name of another person
Big scandals - Big loss:
• WorldCom - $180 billion loss to investors
o (from an $11 billion accounting fraud)
• Enron - $ 74 billion in shareholder losses
• Lehman Brothers - $50 billion in disguised loans
• Bernie Madoff - $21.2 billion in investor losses
o Ponsie Scheme - when one shows and promotes returns and to sustain that, get more
investors and use that money to pay the previous investors their returns and etc.
o Therefore, need a continuous feed of investors
• Satyam - $1.04 billion fraud
o (fictitious 20% revenue boost in just one quarter via fictitious loans)
• AIG - $1.7 billion in improper accounting
o booked loans as revenue
The Fraud Triangle:
• Motive
o to maintain job security
o to comply with debt covenants (company has to achieve certain targets and get loans to
make it look like they have met those targets)
o to meet management targets (internal controls)
• Opportunity
o when internal controls are weak it provides greater opportunity to commit fraud
• Rationalization
o Making excuses and convincing yourself that its okay
o Ex. "everyone does it" , "no one will get hurt" , " I deserve it".
Sarbanes - Oxley Act (SOX):
• U.S's response to accounting frauds - applies to publicly traded companies
• Established the Public Company Accounting Oversight Board (PCAOB)
o oversees the auditors of public companies
o represents investor interests
• External auditors must report to an audit committee, not the management
• CEO and CFO must certify all annual/quarterly reports files by the organization.
find more resources at oneclass.com
find more resources at oneclass.com
