Business Ethics Chapter 10

Fiduciary Duties

A legal duty to act on behalf of or in the interests of another

Internal control

A process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations

Enron Corporation

An energy company based in Houston, Texas, that Fortune magazine named America's most innovative company for six consecutive years before it was discovered to have been involved in one of the largest instances of accounting fraud in world history. In 2001, with over 21,000 employees, it filed the largest bankruptcy in United States history and disclosed a scandal that resulted in the loss of millions of dollars, thousands of jobs, the downfall of Big Five accounting firm Arthur Andersen LLP, at least one suicide, and several trials and convictions, among other consequences. Enron remains in business today as it continues to liquidate its assets.

European Union 8th Directive

Covers many of the same issues as Sarbanes-Oxley but applies these requirements and restrictions to companies traded on European Union exchanges. The updates to the directive in 2005 clarified required duties, independence, and ethics of statutory auditors and called for public oversight of the accounting profession and external quality assurance of both audit and financial reporting processes. In addition, the directive strives to improve cooperation between EU oversight bodies and provides for effective and balanced international regulatory cooperation with oversight bodies outside the EU regulatory infrastructure (e.g., the U.S. Public Company Accounting Oversight Board).

Conflict of Interest

Exists where a person holds a position of trust that requires that she or he exercise judgement on behalf of others, but where her or his personal interests and/or obligations conflict with those of others

Sarbanes-Oxley Act (Public Accounting Reform and Investor Protection Act of 2002)

Implemented on July 30, 2002, and administered by the Securities and Exchange Commission to regulate financial reporting and auditing of publicly traded companies in the United States. SOX or SarbOx (popular shorthands for the act) was enacted very shortly following and directly in response to the Enron scandals of 2001. One of the greatest areas of consternation and debate that has emerged surrounding SOX involves the high cost of compliance and the challenging burden therefore placed on smaller firms. Some contend that SOX was the most significant change to the corporate landscape to occur in the second half of the 20th century.

Duty of Care

Involves the exercise of reasonable care by a board member to ensure that the corporate executives with whom she or he works carry out their management responsibilities and comply with the law in the best interests of the corporation

Committee of Sponsoring Organizations

Is a voluntary collaboration designed to improve financial reporting through a combination of controls and governance standards called the Internal Control-Integrated Framework. It was established in 1985 by five of the major professional accounting and finance associations originally to study fraudulent financial reporting and later developed standards for publicly help companies. It has become one of the mist broadly accepted audit systems fo internal controls

Control Environment

One of the five elements that comprise the control structure, similar to the culture of an organization, and support people in the achievement of the organization's objectives. It "sets the tone of an organization, influencing the control consciousness of its people."

Duty of Loyalty

Requires faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that conflicts of interest are always to be resolved in favor of the corporation

Duty of Good Faith

Requires obedience, compelling board members to be faithful to the organization's mission. In other words, they are not permitted to act in a way that is inconsistent with the central goals of the organization

Gatekeepers

Some professions, such as accountant, that act as "watchdogs" in that their role is to ensure that those who enter into the marketplace are playing by the rules and conforming to the conditions that ensure the market functions as it is supposed to function

Corporate Governance

The structure by which corporations are managed, directed, and controlled toward the objectives of fairness, accountability, and transparency. The structure generally will determine the relationship between the board of directors, the shareholders or owners of the firm, and the firm's executives or management

Insider Trading

Trading of securities by those who hold private inside informations that would materially impact the value of the stock and that allows them to benefit from buying or selling stock