Chapter 3 Test Bank

Multiple Choice Text Questions

1. In the Pinto case, Ford relied on which approaches to ethical reasoning to decide on a
course of action with respect to the faulty gas tank placement:
A.
B.
C.
D.

Egoism and utilitarianism

Enlightened egoism and rights theory
Ethical legalism and utilitarianism
Justice and rights theory

Answer C
2. Each of the following is an ethical issue in business except for:
A.
B.
C.
D.

Honesty and fairness

Independence
Conflicts of interest
Fraud

Answer B
3. The seven signs of a pending ethical collapse include all but
A.
B.
C.
D.

Pressure to make numbers

Whistleblowing hotline
Bigger than life CEO
Doing good in the community

Answer B
4. Fraud can be defined as:
A.
B.
C.
D.

A deliberate misrepresentation to gain an advantage over another party

A cover-up of a mistake made in the financial statements
An error in preparing financial statements
All of the above

Answer A
5. The motivating factor for Sears to charge customers for repairs that were not needed
was:
A. Cover a loss from its business operations

B. Greed
C. Build up certain segments of its business
D. All of the above
Answer B
6. In the Ethical Dissonance Model, a high person-organization fit requires:
A.
B.
C.
D.

High organizational ethics, low individual ethics

High organizational ethics, high individual ethics
Low organizational ethics, high individual ethics
Low organizational ethics, lows individual ethics

Answer B or D
7. Assume you are an ethical person and feel uncomfortable about the way your
company is reporting earnings. You believe it is deliberately overstated. If you want
to bring your concerns to upper management, in which person-organization fit is it
most likely that you will do so?
A.
B.
C.
D.

High organizational ethics, low individual ethics

Low organizational ethics, high individual ethics
Low organizational ethics, low individual ethics
High organizational ethics, high individual ethics

Answer D
8. A unique aspect of occupational fraud is:
A.
B.
C.
D.

The misuse of company assets

The falsification of financial statements
The failure to disclose full and complete information
All of the above

Answer A
9. According to the 2012 Global Fraud Study of the ACFE, which fraud scheme posed
the greatest risks to organizations throughout the world:
A.
B.
C.
D.

Corruption and billing schemes

Improper use of social media
Illegal facilitating payments
Economic extortion

Answer A

10. According to the 2012 Global fraud Study of the ACFE, the most common method of
initial detection of occupational fraud is:
A.
B.
C.
D.

Internal audit
Management review
External audit
Tip

Answer D
11. Internal control over financial reporting includes each of the following elements
except for:
A. Maintaining accurate financial records
B. Providing reasonable assurance that receipts and expenditures are recorded based
on proper authorization by management
C. External audit conducted in accordance with generally accepted auditing
standards
D. Adhering to company policies and procedures
Answer C
12. Each of the following is a pillar of corporate governance except for:
A.
B.
C.
D.

Responsibility
Accountability
Fairness
Independence

Answer D
13. The corporate governance system includes each of the following elements except for:
A.
B.
C.
D.

Board of directors
Internal controls
Executive compensation policies
Monitoring by top management

Answer D
14. The Agency Theory can best be described as:
A. The relationship between top management and the board of directors
B. The relationship between the board of directors and shareholders

C. The relationship between top management and the board of directors, and
shareholders
D. The relationship between the external auditors and top management
Answer C
15. Agency costs refer to:
A. The costs incurred in monitoring managerial performance
B. The costs incurred because there is information asymmetry between the
corporation and outsiders
C. The costs incurred because insiders know more about a company than do
outsiders
D. All of the above
Answer D
16. Backdating of stock options is unethical because:
A. It favors top executives over other company employees with respect to the
number of options
B. It purposefully manipulates the option criteria that determine their value
C. It changes the exercise price on options to benefit top executives
D. All of the above
Answer B
17. The term disgorgement means:
A.
B.
C.
D.

To give up ones meal after eating

To return profits earned illegally
To return ill-gotten gains
To give up ones board position after a fraud incident

Answer C
18. The stakeholder view emphasizes the obligations of management to:
A.
B.
C.
D.

The shareholders
The shareholders and creditors
All parties impacted by corporate decisions in a significant way
The board of directors

Answer C

19. The fiduciary duty of the board of directors includes all of the following except for:
A.
B.
C.
D.

Safeguarding corporate assets

Promoting shareholder interests
Exercising care in carrying out their responsibilities
Representing the interests of all stakeholders

Answer D
20. The level of care expected of a reasonable person under similar circumstances in
meeting ones fiduciary duty is called:
A.
B.
C.
D.

Duty of loyalty
Duty of care
Transparency
All of the above

Answer B
21. Under the Sarbanes-Oxley Act, which of the following bodies must contain members
that are 100% independent of management?
A.
B.
C.
D.

Board of directors
Audit committee
Internal auditors
All of the above

Answer B
22. To ensure audit committee independence, the committee should meet separately with
each of the following groups except for:
A.
B.
C.
D.

Senior executives
Internal auditors
External auditors
The audit committee should meet separately with all of the above

Answer D
23. One failure with respect to the internal controls at Tyco and Adelphia was:
A. Falsification of bank statement balances
B. Top executives manipulated financial statement amounts
C. Top executives used hundreds of millions of dollars from interest-free loans for
personal purposes
D. Top management engaged in a Ponzi scheme

Answer C
24. An ethical corporate culture can best be established by:
A.
B.
C.
D.

Setting a proper tone at the top

Establishing strong internal controls
Having an effective internal audit function
All of the above

Answer D
25. Strong corporate governance relies on a strong board of directors. Which of the
following would be a strong candidate to be a board director for XYZ, Inc.?
A.
B.
C.
D.

Community member who has already served on the board 15 years.

Investor who has a multi-million dollar joint venture with the CEO and CFO.
Retired controller of a Fortune 1000 company.
Community member who receives annual large consulting contracts from XYZ.

Answer C
26. The ethical dissonance model looks at the ethical fit of the organizational and
individual values. The optimal fit for an individual with high individual ethics would
be:
A.
B.
C.
D.

High- High
High-Low
Low- High
Low-Low

Answer A
27. A strong and effective internal control environment can be enhanced by:
A.
B.
C.
D.

Financial statements that present fairly financial position and results of operations
Giving the internal auditors direct and unrestricted access to the audit committee
Having the internal auditors report to the external auditors
Having the external auditors report to the audit committee

Answer B
28. The Institute of Internal Auditors Code of Ethics includes each of the following
principles except for:
A. Integrity

B. Objectivity
C. Independence
D. Confidentiality
Answer C
29. Section 302 of the Sarbanes-Oxley Act requires that management:
A.
B.
C.
D.

Assess the companys internal controls

Certify the financial statements
Disclose all executive compensation
All of the above

Answer B
30. Each of the following is part of the New York Stock Exchange listing requirements
except for:
A. All directors must be independent of management
B. Audit committees must consist of at least three members all of whom are
independent of management and the entity
C. The audit committee should report regularly to the board of directors
D. Each listed company must have an internal audit function
Answer A
31. A troubling result of the 2011 National Business Ethics Survey is:
A.
B.
C.
D.

Increased witnessing of misconduct in the workplace.

Decline in pressure to compromise ethics.
Increased rate of retaliation against whistleblowers.
Decline in negative view of supervisors ethics.

Answer C
32. A seemingly positive result of the 2011 National Business Ethics Survey is:
A.
B.
C.
D.

The percentage of employees who had reported misconduct at work is increasing

Pressure to compromise ethical standards has been decreasing
The rate of retaliation against whistleblowers has been decreasing
The percentage of employees who said they could question management without
fear of retaliation is decreasing

Answer A

33. A unique aspect of Johnson & Johnsons Credo is that it:

A. It is an aspirational statement rather than the typical thou shalt not form of a
code of ethics
B. It encourages employees to internalize the values of the company
C. It follows a stakeholder approach to decision making
D. All of the above
Answer D
34. The 2011 National Business Ethics Survey indicates each of the following with
respect to how employees view the ethics and ethical practices of organizations they
work for except for:
A.
B.
C.
D.

Misconduct at work has declined over the years

Whistleblowing is up
Ethical cultures are weaker
Pressure to cut corners is lower

Answer C
35. With respect to whistleblowing, the Sarbanes-Oxley Act:
A. Protects employees of publicly traded companies who provide evidence in fraud
cases
B. Confers legal protection on managers who reported wrongdoing by top executives
C. Confers legal protection on the board of directors for fraudulent actions by
management
D. All of the above
Answer A
36. A reason that Bernie Madoff was able to pull off the Ponzi scheme for so long was:
A.
B.
C.
D.

He was trusted by those who invested with him

The SEC failed to act on tips about Madoffs questionable practices
The auditors either looked the other way or didnt look too hard to find the fraud
All of the above.

Answer D
37. As a manager in her firm, Lucy concerns herself with the effectiveness of internal
controls. Her main focus is how efficient and effective the companys internal
controls are over time. Which component of internal control is Lucy engaging in?

A.
B.
C.
D.

Risk assessment
Control activities
Control environment
Monitoring

Answer D
38. The COSO report states that management should enact five components related to
internal control objectives including each of the following except for:
A.
B.
C.
D.

Control environment
Risk assessment
Risk activities
Monitoring

Answer C
39. What are the fiduciary obligations of the board of directors?
A. Maximize profits for the company and its shareholders
B. Give excessive executive compensation
C. Safeguard the organizations resources and interests of the companys
stakeholders
D. Allow high risk accounting practices
Answer C
40. Which of the following is not an ethical issue in business?
A.
B.
C.
D.

Conflicts of interest
Maximization of profits
Discrimination
Information technology

Answer B
41. Financial statement fraud includes all but
A.
B.
C.
D.

Overstating revenues
Understating expenses
Overstating warranties on new product
Improper asset valuations

Answer C

42. Which is a questionable ethical work behavior of an employee?

A.
B.
C.
D.

Handing in all assignments on time.

Taking time off without pay to attend to a family crisis.
Using social media during the work day to update your Facebook page.
Giving your best effort during work time.

Answer C
43. What are the four pillars of corporate governance?
A.
B.
C.
D.

Respect, accountability, fairness and transparency.

Responsibility, accountability, firmness and transparency.
Responsibility, accountability, fairness and transparency.
Respect, accountability, firmness and transparency.

Answer C
44. What is the agency problem?
A.
B.
C.
D.

Managers place corporate goals ahead of personal goals.

Managers place personal goals ahead of corporate goals.
Managers place social goals ahead of personal goals.
Managers place corporate goals ahead of social goals.

Answer B
45. What is a cause of agency problems?
A.
B.
C.
D.

Information asymmetry
Information symmetry
Information technology
Information privacy

Answer A
46. Which of the following is not used to overcome the agency problem?
A.
B.
C.
D.

Executive compensation
Audited financial statements
Related party transactions
Internal controls

Answer C

47. Compensation of executives has soared over the last forty plus years to more than 400
times the pay for average workers. Suggested remedies to rein in executive
compensation especially during time of corporate wrongdoing include each of the
following except for:
A.
B.
C.
D.

Say on Pay rules

Disgorgement
Limits on executive compensation
Clawbacks

Answer C
48. The 2010 Dodd-Frank Act includes additional incentives for whistleblowers. What is
the acts effect on whistleblowing by accountants?
A. No accountant, internal or external, whether by job title or certification may
receive a reward.
B. All accountants who whistle-blow are protected against retaliation.
C. Internal auditors who whistle-blow may receive a reward.
D. A CPA may report a violation of a public accounting firms performance in an
audit.
Answer D
49. One of the duties of a board of directors is to protect the interests of stakeholders.
Which of the following is an example of protecting such interests?
A.
B.
C.
D.

Back dating options for executives

Deceptive business practices
Off balance sheet financing
Transparent financial reporting

Answer D
50. The relationship between the shareholders, directors, and management of a company,
as defined by the corporate charter, bylaws, formal policy and rule of law is known as
A.
B.
C.
D.

Code of ethics
Corporate sustainability
Corporate responsibility
Corporate governance

Answer D

51. The aim of executive compensations is to:

A.
B.
C.
D.

Enrich the executive

Align the goals of the executive with the workers
Align the goals of the executive with the shareholders
Enrich the company

Answer C
52. The most important values included in corporate values statements include:
A.
B.
C.
D.

Pursuit of self-interests
Commitment to beating the competition
Diversity
Integrity and ethical behavior

Answer D
53. What is a universitys equivalent of a code of ethics?
A.
B.
C.
D.

Honor code
Student Handbook
Faculty Handbook
Statement of Values

Answer A
54. To whom does the management owe its ultimate allegiance?
A.
B.
C.
D.

Employees
Creditors
Shareholders
Government

Answer C
55. A code of ethics for financial professionals is important under Sarbanes-Oxley
because:
A.
B.
C.
D.

It strengthens the relationship between financial professionals and shareholders

It supports the certification of financial statement requirement
It decreases the likelihood of whistleblowing
It enhances the ethics of the audit committee

Answer B
56. A similarity between the Bernie Madoff situation and that of R. Allen Stanford is they
both were:
A. The head of a major U.S. stock exchange
B. The CEO of a company that went out of business after a major financial
statement fraud
C. Involved in Ponzi schemes
D. Exonerated in a trial because of lack of evidence of wrongdoing
Answer C
57. Henry is the chief accounting office of XYZ Co. He believes the financial statements
are accurate but he has been asked by the CFO to accelerate the recording of revenue at
the end of the year to push a material amount that should be reported next year into the
current year. If Henry is an ethical accountant he should react by:
A.
B.
C.
D.

Going along with the request as a one-time concession to the CFO.

Refuse to go along with the request and report the matter to the board of directors
Discuss the matter with the CEO
Firing the CFO

Answer C
58. An ethical organization incorporates what into their decision-making process:
A.
B.
C.
D.

Core values
Strategic policies
Reporting responsibilities
All of the above

Answer D
59. The Act that enables a whistleblower to receive compensation for blowing the whistle
if the claims are deemed to be valid and the individual is not precluded from receiving
such an award is:
A.
B.
C.
D.

The Sarbanes-Oxley Act

The Foreign Corrupt Practices Act
The Private Securities Litigation Reform Act
The Dodd-Frank Financial Reform Act

Answer D

60. The primary ethical concern when contemplating whistleblowing as an accountant is:
A.
B.
C.
D.

It may violate my ethical obligations

It may fail to correct the matter
It may not be considered ethical by my employer
All of the above

Answer A
Multiple Choice Case Questions
61. In the Parable of Sadhu case, Bowen T. MCoys friend Steve summed up the dilemma
by saying:
A. I feel that what happened with the sadhu is a good example of the breakdown
between ethics in different cultures.
B. I feel that what happened with the sadhu is a good example of the breakdown
between the individual and corporate ethics
C. People tend to inevitably act in their own best interest
D. All of the above
Answer B
62. In the Amgen case, former employees, Shawn OBrien and Kassie Westmoreland,
sued the company for:
A.
B.
C.
D.

Wrongful termination
Fraudulent actions
Discrimination
Retaliation

Answer D
63. The primary ethical issue in United Thermostatic Controls is:
A.
B.
C.
D.

Misappropriation of corporate assets

Accelerating the recording of revenue into an earlier period
Delaying the recording of expenses into a later period
Failure to fully disclose all information

Answer B
64. An important issue in the Hewlett Packard pretexting case was:
A. Using false pretenses to obtain confidential information about members of the
board of directors

B. Disclosing confidential client information without the approval of the client

C. Producing fraudulent financial statements
D. Twittering about a competitor and driving him out of business
Answer A
65. The IRS whistleblowing Case deals with
A.
B.
C.
D.

Ethics of retaliation
Professional whistleblowing for gain
Revenge whistleblowing
Ethics of whistleblowing

Answer B
66. The Bennie and the Jets case deals with:
A.
B.
C.
D.

Proper income classification of rebates received from insurers

Accelerating revenues
Delaying expenses
Failing to record rebates from insurers

Answer B
67. A major allegation in the XTO Energy case was the:
A.
B.
C.
D.

Insider trading
Violation of FCPA
Breach of fiduciary duties by board of directors
Retaliation of whistleblower

Answer C
68. In the Bhopal case, in evaluating its exposure to possible future liability due to
technology failures, Union Carbide used which of the following concepts:
A.
B.
C.
D.

Professional skepticism
Business risk
Cost-benefit analysis
Rights Theory

Answer B
69. The case of Steve Jobss Health deals with:
A. Disclosure issues beyond financial information

B. Disclosures required of members of board of directors

C. Fiduciary obligations of a CEO
D. Fiduciary obligations of a board of directors
Answer A
70.

An important issue in the HP case with event hostess Jodie Fisher is:
A.
B.
C.
D.

Conflict of interest of Mark Hurd

Alleged sexual harassment of Jodi Fisher
Disclosure of confidential client information by Hurd to Fisher
All of the above

Answer D
Essay Questions
1. What is meant by corporate governance? Describe the elements of a governance
system and how it can help to enhance financial reporting.
Answers will vary
2. Compare and contrast the agency and stakeholder theories of corporate
governance from the perspective of those involved in and affected by managerial
decision making.
Answers will vary
3. A strong and effective system of internal controls can help to create an ethical
corporate culture. Explain how the internal control system can enhance ethical
decision making.
Answers will vary
4. Tommy Hubbs is the controller of XYZ Corporation. Recently, Hubbs was
approached by Carol Franks, the CFO, and told in no uncertain terms to record
$100,000 in revenue at the end of 2013 even though the sale was not made until
January 3, 2014. Describe Hubbss ethical responsibilities in this matter if he is a
CPA?
Answers will vary
5. Refer to question 4, assume Hubbs decides not to go along with Franks dictum.
What steps should he take in trying to resolve the matter?
Answers will vary

6. What are the most important values to include in a corporate code of ethics or
credo and why are these important values?
Answers will vary
7. Analyze the reaction of Toyota from an ethical perspective to disclosures that
occurred in late 2009 and early 2010 that the accelerator in some brands might get
stuck and result in unintended acceleration of the car. How does Toyotas reaction
relate to that of Ford with the Pinto and Johnson & Johnson with the Tylenol
poisoning?
Answers will vary
8. What is whistleblowing? Distinguish between internal and external
whistleblowing including the parties that might be contacted in each case. Is it
ethical to provide incentives or rewards for people to whistle-blow?
Answers will vary
9. Explain the ethical dissonance model and what a high ethics individual should
look for in finding an ethical employer.
Answers will vary
10. An Internet Company has a chance to expand its business into a developing
country. This chance would make money for its shareholders, as it would be the
first Internet Company allowed in the country. However, the conditions demanded
by the country is that the Internet Company must turn over to the government the
history of Internet sites visited by its citizens. Additionally the Internet Company
must also censor Internet sites requested through the search engine. In the United
States and other countries, the Internet Company would not monitor, censor, or
turn over a history of Internet sites to any government.
What should the Internet Company do? Use ethical theories and ethical decision
making model to back up your decision.
Ans:
Issues: The Company is faced with the decision of whether to treat citizens in one
country differently than citizens in other countries. This is a troubling issue since
it applies to the right to privacy of the citizens. The Company is also faced with
whether their primary obligation is to make profits for shareholders per Milton
Friedman or per another ethical theory. In looking at the different ethical theories,
rights approach would say if one countrys citizens are entitled to privacy, then
another countrys would also. Deontology would also say that the imperative
universal would require citizens of all countries to be treated the same.
Utilitarianism would say that the end justifies the mean so that the company

would have to decide if the end was profits or treating all citizens of the world
the same.
11. A school district decided to add an ethics officer to its administration. The district
had watched how often the district was dealing with ethically sensitive situations.
After doing research into how many organizations used an ethics officer and the
desired education and background for such an officer, the district advertised for a
person with the following qualifications: education in accounting, finance, or
criminal justice; CPA preferred; and experience with compliance or audits. The
district hired a person with a CPA license, degree in accounting and experience as
an internal auditor doing compliance audits.
At the press conference to introduce the new ethics officer, a local news reporter
pointedly asked about the candidates background. The ethics officer stated as a
CPA he knew how to handle ethical issues and he had the highest integrity. The
reporter decided to a little more background research before writing the article.
The state board of public accountancy of that state maintained an online database
for the public to verify that a CPA was currently licensed. When the reporter could
not find the ethics officer as a currently licensed CPA, he called the district and
the ethics officer for a comment.
What should the district and ethics officer do? Use the ethical decision making
model to defend your answer.
Ans: Many articles in the news often deal with job candidates who lie on their
resumes. Beyond the obvious lack of honesty in lying on the resume for an ethics
officer position, the district has invested time and money to interview and select a
candidate. Any runner-up candidates may not want the job after negative publicity
on the district and the candidate that was chosen. An additional question might be
to ask whether the district should now include an extensive background check on
any job candidates or not and what is the ethical reasoning behind such a policy.
Actual case follow-up: The ethics officer had passed the CPA and was a licensed
as a CPA in the state until 10 years ago when his license was revoked by the state
board of public accountancy due to failure to complete required continuing
professional education (CPE) hours and to pay license fees. The officer resigned
before the district could fire him. He claimed he did nothing wrong as he had
passed the CPA exam and had been licensed, so he felt he was still a CPA. The
district was embarrassed and vowed to do extensive background checks on any
new candidates. The preferred CPA was no longer part of the job position.
12. As part of a required ethics course, students were required to take an online 90
minute ethics final. Facing graduation and many pressures with starting new jobs
and moving, the students worked together to complete the final. Since the essays
were all closely worded the same, the instructor could determine that some sort of
cheating on the ethics exam had taken place. Using ethical decision making

model, what should the school, instructor and students do? Would the suggested
solution be different if the school had an honor code?
Ans: The students used an egoism approach to rationalize cheating on the final.
The school and the instructor have the dilemma of what to do. Although many
would agree with punishment for the cheating, the dilemma is what is the
goal/role of a school and course. As an educational institute, the goal is probably
to educate the students. Is the cheating incident a failure of the students or the
program? One solution that the students may not think of is that the cheating
students would have to use ethical reasoning and ethical decision making model
to justify the solution to the problem they caused.