Business Ethics Exam 1

. List specific behaviors of 'high integrity'.

1. Possess Humility o People have to be humble and not so full of themselves when talking about accomplishments. 2. Maintain Concern for the Greater Good o Do not make decisions that only benefit you, think about what choices will benefit the whole workplace. 3. Be Truthful o Do not lie about mistakes, accidents, or unethical behavior, be honest and open. 4. Fulfill Commitments o Always put your best foot forward, do not turn things in late or incomplete. 5. Strive for Fairness o Be free from judgment and make decisions that benefit everyone and not just select people. 6. Take Responsibility o Own up to the things you have done, do not take credit for other work, and own up to your mistakes. 7. Have Respect for the Individual o Have respect for others in your workplace, do not judge or discredit anyone. 8. Celebrate the Good Fortune of Others o Be happy for others and their accomplishments, do not try to drag them down. 9. Develop Others o Help train others and give them advice, try not to leave them out on their own. 10. Reproach Unjust Acts o Refuse to do things that you know are unjust, stand up and say no. 11. Be Forgiving o Be understanding that people make mistakes and that some people deserve a second chance. 12. Extend Self Others o Be generous with rewards and helping individuals in the workplace out.

5. Ethical behavior must be the norm in four critical areas, as it relates to 'customers as stakeholders', describe them.

Customers must have a high level of trust with the firms they are buying goods and services from, or the customers will seek those goods and services from companies they feel they can trust. So, the four critical areas are: a) The manufacturing process o When buying a product from a company, a customer expects for this product to be safe and not a danger to themselves or the public. In addition, customers expects that this product is the companies own idea/they own the legal rights to it. A customer does not want to buy a product that has be illegally copied or counterfeited from another company. Lastly, a customer expects for their product to be the same as the one in the advertising they saw. They do not want to order a product they saw on TV to only get a product that is not similar to the one they saw. b) Sales and quotes o Customers expect that salespeople will be honest and ethical in dealing with them. When buying an item, a customer expects the price to be valid and the product to be in good condition. They customer should be able to trust they are getting the correct product, paying the price stated, and they are not getting some knock off or damaged product. i. An example of misleading information is the use of stealth marketing. Stealth marketing is having a company give financial incentives to people who, through word of mouth, explain why the product should be bought. The customers may not realize that they are receiving purchasing advice from a paid endorser of the product. Which in return can be bad because if the endorser is hyping up a bad product, then the customer just got lied to and will not be able to trust the company in the future. o Along with that, a customer should not be tricked into buying another product when they have already selected one. Lastly, businesses must abide FCPA of 1977 which states they can not make illegal brides in order to secure business contracts. c) Distribution o If a customer places an order, then they expect to receive the product they selected. However, if adjustments need to be made, then the customer should be aware of this before they receive the product or pay for the product. A customer does not want to see their item just randomly changed without being consulted about the changes. d) Customer service o The firm is expected to honor any guarantees or other promises given to the customer at time of purchase. When doing this, a customer will trust the firm and want to order from them again. For example, if a firm says they take returns, then a customer should easily be able to contact them and return their item without a hassle. e) Overall Overall, these are 4 ethical point that a firm should follow. A firm wants to build trust will customers and make them come back. They more trust they build, the more customers will be attracted to the firm and customers will be willing to spread positivity about the company. In addition, it is important about being upfront with the customer instead of tricking them or lying to them. If a product needs altered or if they do not accept return, just be honest instead of misleading. The clearer a firm is, the better off it will be. Do not lie or trick a customer just so you can get a few bucks because in the long run those customers will not return

Define integrity, and explain the following tests of integrity: publicity, trusted friend, reciprocity, golden rule, universality, and obituary.

Integrity is defined by Merriam-Webster Dictionary as "a firm adherence to a code of especially moral or artistic values." o The publicity test is a test that would ask people if they felt comfortable if their actions were made public in a newspaper or on another form of broadcasting. (Example: Would you be comfortable if we broadcasted on the news that you bullied another person?) o The trusted friend test is a test that would ask if you would feel comfortable telling a trusted friend or adult about the actions you have made. (Example: Would you be comfortable telling your mother that you bullied another person?) o The reciprocity test is a test that would ask you if you felt that you treated people the way you would want treated. This rule is also most commonly known as the Golden Rule. (Example: Are you proud of how you made fun of another person today and would you like to be made fun of?) o The universality test is a test that would ask you if your actions would be acceptable if someone else in the world did the same. (Example: Would it be acceptable if anyone else in the world bullied another person?) The obituary test is a test that asks you to reflect on your previous actions in your career and tell them if you feel comfortable with that evaluation. (Example: Would you be comfortable reflecting back on the actions you have made?)

How does Kant's Ethics attempt to 'bridge the gap' between the two ethical concepts mentioned in question #4?

Kant argues that the free will to make decisions that were considered rational needed to be converted into a universal will. Dualism is what Kant made to bridge the gap between Contractarianism and Existentialism. Kant explains that an individual should act in a way that everyone was to act in if there was universal free will. We should treat others as the end, and not a means to an end. We cannot trust that "gut feeling" with everyone because lots of times people are wrong. Instead, we are to ask ourselves if this would be acceptable as a universal will. For example, if we were to dump toxic waste into a lake would it be okay if everyone else did. The choice we make should not be made by legal decisions, instead it should be made by considering if this would be acceptable if, we had universal will. So, we take the concept from Existentialism to understand free will and making choices and we mash it with Contractarianism to understand that these choices should be made while considering others and to make choices that would be acceptable for everyone.

2. Describe 'four avenues' along which unintentional unethical behavior may be developed

There are four avenues in which unintentional unethical behavior may be developed which include: 1. Implicit forms of prejudice o Implicit Prejudice is a bias that occurs based on unconscious beliefs. This bias occurs when a decision maker supports a decision that pertains to someone. However, they make this decision based on unconscious stereotypes and or comparisons. Implicit prejudice can be based on comparing past behavior to a person in the past that had similar characteristics to a person currently working for the organization or based on stereotypes like gender and ethnicity. 2. A bias that is favorable to the decision maker's own "group," o In-group favoritism occurs when the decision maker forms a bias toward individuals in the same "group" as the decision maker. For example, a group close to a boss or manger might get more help than someone who is not very close to them. This bias can be harmful because everyone should be being treated the same. This bias might be caused by similar interests, backgrounds, or ethnicities. 3. The tendency of the decision maker to claim credit for other people's actions o Claiming credit for others' actions occurs when the decision makers believe that they are above average in most areas of their working field. For example, they believe they are better with job duties, responsibilities, and general intellect. If everyone claims to be doing 110% of the work, then the performance will be above average when that is not true at all. In a working place, everyone is doing different work leading to 100% performance being done or less. 4. Actual and potential conflicts of interest. o A bias occurs when there is a conflict of interest, and the decision maker favors a solution in which there would be personal benefits. Conflicts of interest can impact the goal or intentions of a decision maker by changing what the original course of action was. With this being said, decision makers must make themselves aware of the potential unconscious biases that could affect their overall decision making. They also must consider the environment they are in and what could possibly cloud their judgement. (Is lying tolerated in your environment? Could that lie cloud your judgment and decision making?)

. Briefly discuss two forms of cheating that currently exists in society today.

Two forms of cheating that currently exist today are: 1. Technology cheating: o Technology cheating is using the internet to benefit you on things like a paper or test. What is most seen today is using the internet for plagiarism. Before the internet everything was unique and from an individual's mind, but now people copy other people's work and sometimes claim it as their own without giving proper credit. Along with that, technology has also been used for cheating on tests. For example, some students in high school have been caught using a phone during a test to copy answers down from a study guide. 2. Academic cheating: o Academic cheating is cheating by finding ways to increase your grade or help others increase their grades. An example of this is copying answers down from a test and then giving it to your friend who has the class next. Instead of that student trying to do their best, they are getting an advantage over the rest of the class. Along with that, students also have cheated by giving their homework out for others to copy. Academic cheating is seen as so-called helping others, but in reality, that student always getting help will never learn.

Describe immoral, amoral, and moral managers, as it relates to their relationships with stakeholders.

a) Immoral o An immoral manager is one who does not care how his or her decisions affect the stakeholders, but the actions are actively counter intuitive to what is the right and ethical thing to do. o These managers focus only on their own goals and the goals of the company. They consider legal requirements as constants or barriers that are ignored when their corporate actions are implemented. These types of immoral managers can reach the pinnacle of a company and are able to disperse their immoral viewpoints throughout the company. Which in return can be really bad for a company because you want the company to follow legal requirements, so they do not get in trouble. o Relationship with Stakeholder § Being that an immoral manager does not give much care towards decisions, shareholders are also given very little attention. Immoral managers only care about getting money for themselves and ranking higher, so they will keep all actions hidden from stockholders. b) Amoral o An amoral manager is a manager who could be considered ethically neutral. o An amoral manager does not focus proactively on ethical issues, nor does he or she try to purposely go against the social and legal norms that are expected of the firm by society. With this comes some disadvantages because if they are not looking for ethical issues then they may be missed. Along with that, if they are not looking for ethical issues they may accidentally cause and ethical issue too which would be a big problem for stakeholders. For example, a company may have a weight requirement for safety reason, but someone under weight could be just as good. o Relationship with Stakeholder § Amoral manages do not see shareholders as a group who is more important than any other group in the firm. They do understand that they have to get along with shareholders however, they will only do what is legally required of them. c) Moral Managers o Moral managers are those decision makers who understand the importance and relevance of considering ethical issues when they are making decisions. o These managers meet the minimum legal standards and are proactive in presenting ethical leadership to the firm's employees and other stakeholders. o Relationship with Stakeholder § Moral managers care about the decisions they make so they consider both the long term and short-term impacts of their choices. They treat all their stakeholders the same and help them out in any way they need. Moral managers make sure codes are in place and that ethical standards are be upheld.

Define 'stakeholders' and describe how the importance of stakeholders is determined.

a) The first theory of stakeholders was presented by A. A. Berle in the Harvard Law Review in 1931. Berle stated that all of the powers that are given to a corporation are to be used to create benefits in the interest of the shareholders. He argued that managers within a corporation should consider themselves trustees and guardians of the investments made by the shareholders. However, in 1932, E. Merrick Dodd stated that the interests of the shareholders should be considered but that corporations also needs to recognize their obligations to the community, to their workers, and to the consumers. Dodd says that corporations are allowed to become legal entities because they serve a purpose to the community. So, after many years of debate, including debates from Edward Freeman, they came up with the definition of stakeholders which is: a. Stakeholders are defined as any group or individual that has a vested interest in the operations of the firm. Traditional stakeholders for a firm include employees, suppliers, stockholders, customers, the government, local communities, and society as a whole. This chart shows how a firm and stakeholder should interact for a smooth-running company. o How is the importance of stakeholders determined? o How we identify the importance of stakeholders is to examine the attributes of power, legitimacy, and urgency of the stakeholder group. § Power · Power is the extent to which the organization can influence or impose its will on the stakeholder group. § Legitimacy · Legitimacy is the assumption that the actions of the corporation are desirable, proper, or appropriate within the limits of the corporation. § Urgency · Urgency is the degree to which the issues raised by the stakeholder must be dealt with in a time-sensitive manner. o If you have power, legitimacy, and urgency, you are then considered a high-propriety stakeholder. Using this attribute approach, corporations are able to better determine which stakeholder groups have the highest priority in their day-to-day operations. o It is key to understanding if stakeholders are high priority because they impact organizations in four key ways: § Stakeholders establish expectations (explicit or implicit) about corporate performance. § Stakeholders experience the effects of corporate behaviors. § Stakeholders evaluate the effects of corporate behaviors on their interests or reconcile the effects of those behaviors with their expectations. § Stakeholders act upon their interests, expectations, experiences, and evaluations.

4. List the three primary objectives of financial reporting.

a) There are three types of primary objectives of financial reporting which are: 1) Accurate financial reporting is needed to provide investors and other interested parties with the ability to make investment, credit, and financial decisions that relate to the firm. 2) Accurate financial reporting is needed to help the reader determine the level of cash flows for the firm. 3) Accurate financial reporting is needed to help identify the economic resources and obligations to the firm, as identified by the Financial Accounting Standards Board. b) Keeping in mind, you have to understand that two accountants with the exact same information may make two completely different decisions based on their own cognitive lenses.

3. Define the 'triple bottom line' and describe the 'focus' of both environmental and social performance.

a) Triple bottom Line o is a concept that is receiving momentum as a way of satisfying the reporting and disclosure needs of various stakeholder groups, although many companies refer to the concept as an accountability report. o The triple bottom line was first introduced in 1998 by John Elkington in his book Cannibals with Forks: The Triple Bottom Line of Twenty-First Century Business. The whole concept of this was to line expand traditional financial reporting to include environmental and social reporting. It was also known as the 3BL or the "People, Planet, Profit." The triple bottom line centers on the interests of all the stakeholders instead of focusing only on the interest of the shareholders. If we focus on the environmental and social impacts as well as the financial impacts, this will encourage a firm to establish social and environmental objectives/goals. With these goals in place, it will be easier for firms to approach those issues that would result in long-term financial rewards for the firm. It is important to establish metrics for nonfinancial objectives so that it can evaluate the effectiveness of the firm in achieving these goals. Also, with these objectives in place it will allow more transparency of the firm so stakeholders can see how they truly are. b) Focus of environmental performance o The focus of environmental performance is on the number of resources used in operations such as water, land, and energy. Along with that, it also focuses on by-products of the process like chemical materials, air emissions, waste, and long-term impacts. o Doing this helps us understand how a business is impacting an environment. It also allows for stakeholders to assess if they are putting to much waste out and harming the environment. c) Focus of social performance o Social performance is based on how the firm and its suppliers both positively and negatively affect the local communities in which they operate. o This allows for stakeholders to see how well a business interacts with others and how they interact with the community. If a business interacts poorly with other, then it might be a bad place to want to invest their time and money. d) Importance o It is important in understanding the triple bottom line, the environmental performance, and the social performance because this type of reporting allows a quicker response by management. Since these objectives are being monitored it allows a closer matching of the firm's actions and stakeholders' expectations. Things will run more smoothly when stakeholders understand the actions that a firm has already being doing. In addition, this triple bottom line report is not only for a stakeholder's benefit, but this is a tool the firm uses to enhance its long-term sustainability from both a financial and a nonfinancial perspective.

Describe the following ethical examinations: descriptive, analytical, and normative.

a. Descriptive ethics is the presentation of facts related to the specific ethical actions of an individual or organization. We use descriptive ethics to understand the course of events that led to this ethical issue. It helps form the basis of how and when this occurred. With descriptive ethics there are no assumptions or interpretations of the facts. b. Analytical ethics or metaethics, can be described as understanding the reasons a course of action that may have an ethical impact took place. With analytical ethics we want to understand the why of this problem, what was the motive? Analytical ethics allows for hypothesis so we can understand all variables. c. Normative ethics can be defined as a prescribed course of action that attempts to ensure that ethical behavior will be followed in the future. With normative ethics, we shift the focus from past to future so we can resolve problems before they arise. What can we do in the future to help prevent more problems from arising?

Discuss Ethical Egotism and Utilitarianism

a. Ethical egoism o Ethical egoism is based on the belief that every individual should act in a way to promote himself or herself if the net result will. When making a decision you want to make it so you benefit from it, but you also want this choice to benefit others in a positive way. This is where we get that gray area because technically you cannot define where that balance is. For example, someone may think a park should be turned into a mall because it will allow more people to shop and get products. They believe they are benefiting because of money, providing to the community, and they think people are benefiting because they are able to access more products. Whereas the mom with her 5 kids just lost a park that helped them stay active. So, the company thinks they are helping by providing more resources, why spend all this money on a new building if we did not think it would help? Whereas the mom thinks they are just taking a park away to make more money. Like stated in the textbook, "Some ethical egoists may argue that based on their own perceptions, all of their actions, on balance, generate more positive than negative benefits". Ethical egoism allows for a lot of reliance on self-perceptions rather than facts. Philosophers state that ethical egoism is beneficial because it allows self-reward while also helping others around. Whereas others argue about whether people truly have positive motives behind these actions. So, the question ethical egoism is trying to help answer is, what are motives behind different individuals? b. Utilitarianism Utilitarianism holds the belief that any action of an individual will be based on providing the greatest good for the greatest number of people. When making a choice, utilitarianism's belief is that you are helping the community all together. What actions will help most people out? This belief is focused more on the overall benefit everyone receives rather than the motive of their actions. Utilitarianism is focused on: Act utilitarianism which is based on a single individual and Rule Utilitarianism which is guiding behavior indirectly through an evaluation of ethical conduct via rules and procedures. Utilitarianism is used to help capture the benevolent behavior of others; we help others when we benefit from self-interest. Whereas others state that this framework doesn't properly evaluate the effectiveness of utilitarianism because how is it fair to determine who needs the most help and who will receive that help? With that, where does that leave the minority?

Define 'ethics' and 'business ethics'

a. Ethics is defined as the values that an individual uses to interpret whether any particular action or behavior is considered acceptable and appropriate b. Business ethics is defined as the collective values of a business organization that can be used to evaluate whether the behaviors of the organization's collective members are considered acceptable and appropriate. Business ethics helps to understand what is acceptable and appropriate for individuals, their moral values must be identified and supported.

Describe how Existentialism and Contractarianism differ.

a. Existentialism o Existentialism is based on the underlying belief that the only person who can determine right and wrong is based on the free will of the person making the decisions. We all know and understand what choices we make in life; with those choices we take responsibility and the repercussions of those actions. With our actions, we develop a sense of self or sense of personal virtue. Existentialism tries to show that we as humans should have that free will to make our own choices because we determine acceptance of our actions. b. Contractarianism Contractarianism or social contract theory is based on the belief that all individuals agree to social contracts to be a member within a society. When you are born, you become a member of society which comes with responsibilities but obviously not until you're older. We have to function together as a society which comes with following rules that make things fair. Everyone in a functioning society should have equal rights and duties and when inequalities occur it should only be if it benefits the whole society. It is not fair to focus on just making the biggest impact if not everyone can benefit, like the minority groups. c. Difference Existentialism focuses on what we as individuals want to do. If we want to do something we take responsibility for those actions and we should understand right from wrong. Whereas Contractarianism focuses on making choices that everyone can benefit from. We as a society want to function together as a group and allow everyone to benefit, not just make choices the benefit you or a few people.

Explain how accounting is a 'critical tool', as it relates to ethics and financial reporting.

i. Accounting is a critical tool as it relates to ethics and financial reporting because accounting helps managers make decisions. Along with that, the financial report is very important because it shows how well a business is organized, how can the business move forward in the future, and it shows how the business has done in the past. In addition to that, the financial statement is only as good as the numbers are. ii. Accounting is also very important because misrepresented financial statements is known as "cooking the books." Accounting like this is what has led to Creative accounting and that can be defined as: the deviation from the traditional methods used to interpret an accounting rule or standard. With this type of accounting, it walks the fine line between legal and illegal activities. iii. So, having tight and controlled accounting is important in keeping a business organized and on the legal side. As stated before, this accounting is critical because it helps manages in deciding what proper decisions to make for a business.

2. Summarize the mechanism used in 'Ponzi' schemes.

i. First off, who is Ponzi and what scheme did he create? a. Ponzi was a man who moved from Boston to Montreal and served 3 years in prison for check forgery. Ponzi however, thought that was not enough so, he devised a "scheme" to make money illegally. Ponzi promised investors that they would receive an increase in their investments by 50% in just 45 days. b. How this scheme worked. i. Ponzi first started out by buying mail coupons for a fixed rate and selling them for profit because of the fluctuation exchange rate between countries. He then, used the purchasing and selling of the coupons to "explain" to the customers how he was making money. However, Ponzi never really made an investment into these coupons because he was tricking investors to help him out. He would take investor A's money and then get paid by investor B for another investment. Instead of paying investor A his money with the coupon profits, he paid investor A with investor B's money. He then had to keep having investors so he could continue this scheme. If you think of it as pyramid and Ponzi being on top, it helps you better understand it. Ponzi gets paid by the second level and the third level pays Ponzi money too. However, the third level's money is taken and given to level two and so on and so forth. That is why the Ponzi scheme is also known as the pyramid scheme. So, this is like a never-ending loop until the "Ponzi" is caught in the act, but because the return rates were so great, everyone wanted to invest.

3. Describe 'insider trading', and it's three major categories.

i. Insider trading is when an employee breaches his or her fiduciary duty by using material nonpublic information to make decisions based on the employee's self-interest instead of the best interests of the firm. ii. What exactly does that mean? a. This means that an employee obtains information that is non-public. For example, they may have gotten insider information that a stock is going to drop so they immediately pull their company from it. This is illegal because you cannot use this information for the benefit of your company. However, you can use this basic insider information like asking a company how much traffic they get in their stores. b. Two-part evaluation of whether insider trading has taken place i. Part One is determining if a relationship has occurred in which information has been obtained that is available only from within the corporation. ii. Part Two determine whether there is an inherent unfairness to taking advantage of the information that is not available to the public. iii. Three Categories of Insider Trading a. Traditional Theory i. Traditional theory focuses on the asset of insider information based on the position of the individual. These types of inside traders include officers, directors, employees, and stockholders. The connection to the to the information flow within the firm that allows them to obtain insider information. b. Temporary Insiders i. Temporary insiders are people who do not have a permanent position with the firm but are still aware and knowledgeable to insider information. These types of insiders can include accountants, lawyers, and consultants. Even though they are just there for a certain period of time, they are still informed about insider information. c. Tippers and Tippees i. Tipper is someone who has gotten a hold of insider information and has disclosed that information to another person who is the tippee. A tippee is the one who receives a tip especially. Now, both the tipper and the tippee are subject to prosecution if insider information was used by the tippee.

. List four responsibilities of auditors, in accordance with the Generally Accepted Auditing Standards.

o An audit consists of an inspection of the accounting records and other information deemed necessary to express an opinion on the fairness and adequacy of the financial statements. 1) When faced with a gray area, perform appropriate procedures to test and corroborate management's explanations and representations, and consult with others as needed. a. In order for an appropriate report to be made, you can not just look past the gray areas and expect for that to be okay. In order to have the most accurate information, ask the management and make sure you ask around as well. 2) Identify key risk areas, particularly those involving significant estimates and judgments. a. When you are an auditor, it is important that you are aware of a business's risk area. That way when you go into to do your evaluation, you know where to look and what to analyze closely. Also, it is important to make note of those in your report, so they do not go unnoticed. 3) Make management aware of identified audit differences in a timely manner. a. If there are audit difference, then you need to make the management aware so they can figure out why. It is not right to not make the management aware that there are differences because then it gives them no chance to explain why. 4) Question the unusual and challenge anything that doesn't make sense. If something seems off or you do not understand where numbers are coming from, then you need to ask questions and make that clear. Sometimes you might have missed something or there is something actually going on. If you just keep it to yourself, then the report will be inaccurate and not valid

4. Briefly discuss the pros and cons of 'outsourcing'.

o Outsourcing is assigning a function or task that was previously done within a company to an external third party. a) Pros o The Pro of picking a third party for your resource can be beneficial in many ways. If you get your products made in a different country like China, the cost to produce the product is significantly lower. So, if the cost to labor/produce the product is way cheaper then the company can make more profits. That means that the more profits to the business, the bigger the business gets. b) Cons o The Con of picking a third party for your resources can be what you are supporting. If you get your resources from a different country, then the people producing these items are getting paid very little. Not only are they getting paid little, they also are working in very poor/unsafe working conditions. In addition, these types of countries who produce products for very cheap have been caught for child labor and abuse. c) What is better? o Is it better to get your products cheap so you can make that extra penny or just pay that extra penny to prevent these unsafe working conditions? If you really cared about your product, you would care about where it came from. However, people are very money hunger so they will do anything to cut their costs down. d) Examples o China: China has been caught for very unsafe working conditions and the death rate for workers is 10 times than in the US. o Brazil: Brazil was found to be promoting forced labor, unequal pay for women, and safety issues in the workplace. Not only that, but thousands of workers are also employed without any pay because they are required to pay off debt bondage or were abducted, which results in de facto slavery conditions. o South Africa: In South Africa, child labor is high and the working conditions there are terrible.

Describe the Sarbanes-Oxley Act (SOX) 2002, and list four of its provisions

o The Sarbanes-Oxley Act is geared toward public companies and was established to help increase transparency, integrity, and accountability of public companies, it has been touted as the biggest reform in corporate America since the 1933 Securities and Exchange Act. At first, companies were very upset about the SOX however, after a survey was done it was found that the SOX actually helped a ton of companies. o As many Acts go, there are a number of provisions in SOX have both immediate and long-term impacts on how firms are monitored in the United States. These include the following: 1) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board, composed of five members who are considered to be "financially literate." Of the five members, two must be certified public accountants (CPAs). The oversight board creates and approves the guidelines used to audit companies. a. This is important to have so you have legit conformation that the guidelines are being approved. Along with that, having five people allows for there to be less illegal activity because they can hold each other accountable. 2) The firm's audit committee must preapprove all the services provided by the external auditors. a. Making sure that everything is preapprove is important so that nothing goes unnoticed. In addition, having this preapproved allows for the decisions to have more than one input and the external auditor can make sure what is going on is legit. 3) For each client, the lead audit partner and the partner responsible for the audit must change at least once every 5 years. a. Having them change every 5 years is like changing the president. If you keep the same people, then things will start to go unnoticed. Along with that, then no new errors will be noticed since they are so used to the same old things. 4) The external auditor must review the internal control procedures of the firm. a. Making sure and external auditor analyze the internal control is important because possible illegal things will be done when everything is kept withing the firm. Whereas having eyes from the outside in, will allow for those mistakes and illegal things to be caught. Overall o Through SOX developments, top management and board members will no longer be able to use the excuse that they didn't know what was happening when a company is caught conducting itself unethically. With SOX it means that managers and directors will have to participate more and be more aware of things. For example, top management must know what is going on with their, they must be more involved with day-to-day things, companies will need to place greater reliance on the information provided by their service providers, information must be accurate, and it is extremely important to choose service providers wisely in this age of the new internal control reporting environment under SOX.