chapter 10 Ethical Decision Making: Corporate Governance, Accounting, and Finance

_____ rely on gatekeepers for fair and effective functioning of economic markets. A. Bankers B. Politicians C. District attorneys D. Financial analysts

A. Bankers

Which of the following legal duties of board members suggests that a director does not need to be an expert or actually run the company? A. Duty of care B. Duty of good faith C. Duty of candor D. Duty of loyalty

A. Duty of care

Which of the following statements is true of the Sarbanes-Oxley Act? A. It includes requirements for certification of documents by officers. B. It focuses mainly on the tone or culture of a firm. C. It does not require lawyers to report concerns of wrongdoing if not addressed. D. It does not require codes of ethics for senior financial officers.

A. It includes requirements for certification of documents by officers

Which of the following statements is true of Section 201 of the Sarbanes-Oxley Act? A. It prohibits various forms of professional services that are determined to be consulting rather than auditing. B. It requires a company's management to file an internal control report with its annual report each year. C. It provides the codes of ethics for senior financial officers. D. It mandates that members of public company audit committees should be independents with a total absence of current or prior business relationships.

A. It prohibits various forms of professional services that are determined to be consulting rather than auditing.

Which of the following provisions of the Sarbanes-Oxley Act addresses the services outside the scope of auditors? A. Section 201 B. Section 301 C. Section 404 D. Section 407

A. Section 201

Which of the following scenarios gives rise to conflicts of interests in corporate governance? A. Senior executives determining the compensation received by board members B. Board members hand-selecting employees in their company C. A CEO not chairing the board of directors D. The absence of cross-fertilization of boards

A. Senior executives determining the compensation received by board members

Identify an external mechanism that seeks to ensure ethical corporate governance. A. The Sarbanes-Oxley Act B. The COSO framework C. The European Union 7th Directive D. The European Union 4th Directive

A. The Sarbanes-Oxley Act

Sara, an employee of PentaComp Inc., passed on confidential information of her company to her friend. Her friend benefitted from selling PentaComp's stock based on the information shared by Sar A. In this scenario, Sara can be convicted of _____. A. insider trading B. falsifying documents C. underreporting income D. evading taxes

A. insider trading

The function of auditors as gatekeepers is to: A. verify a company's financial statements so that investors' decisions are free from fraud and deception. B. evaluate a company's financial prospects or creditworthiness, so that banks and investors can make informed decisions. C. ensure that decisions and transactions conform to the law. D. function as intermediaries between a company's stockholders and its executives.

A. verify a company's financial statements so that investors' decisions are free from fraud and deception.

According to the Federal Sentencing Guidelines (FSG) for boards, a board must: A. work with executives to analyze the incentives for ethical behavior. B. avoid exercising reasonable oversight with respect to the effectiveness and implementation of an ethics program. C. leave the evaluation of all board policies, procedures, governance structure, and position descriptions to the executives. D. always resolve conflicts of interest in favor of an individual board member.

A. work with executives to analyze the incentives for ethical behavior.

identify the gatekeepers who guarantee that executives act on behalf of the stockholders' interests. A. Underwriters B. Board of directors C. Auditors D. District attorneys

B. Board of directors

Which of the following is addressed by Section 406 of the Sarbanes-Oxley Act? A. The tone or culture of a firm B. Codes of ethics for senior financial officers C. Management assessment of internal controls D. Policies and procedures that support the control environment

B. Codes of ethics for senior financial officers

Identify the duty of obedience according to which board members should strive toward corporate objectives and are not permitted to act in a way that is inconsistent with the central goals of an organization. A. Duty of care B. Duty of good faith C. Duty of candor D. Duty of loyalty

B. Duty of good faith

Which of the following is the role of attorneys as "gatekeepers"? A. Verifying a company's financial statements B. Ensuring that a company's decisions and transactions conform to the law C. Evaluating a company's financial prospects or creditworthiness D. Functioning as intermediaries between a company's stockholders and its executives

B. Ensuring that a company's decisions and transactions conform to the law

Identify a true statement about Section 301 of the Sarbanes-Oxley Act. A. It prohibits various forms of professional services that are determined to be consulting rather than auditing. B. It mandates that a majority of a public company's board should be independents. C. It outlines the rules of professional responsibility for attorneys. D. It outlines the codes of ethics for senior financial officers.

B. It mandates that a majority of a public company's board should be independents.

Which of the following provisions of the Sarbanes-Oxley Act addresses the rules of professional responsibility for attorneys? A. Section 201 B. Section 307 C. Section 406 D. Section 407

B. Section 307

In the context of elements of the Committee of Sponsoring Organizations, identify a true statement about information and communications. A. They address the policies and procedures that support the control environment. B. They are directed at supporting the control environment through fair and truthful transmission of information. C. They set the tone of an organization, influencing the control consciousness of its people. D. They are directed at providing assessment capabilities and uncovering vulnerabilities.

B. They are directed at supporting the control environment through fair and truthful transmission of information.

Which of the following is true of the Committee of Sponsoring Organizations controls and the Sarbanes-Oxley requirements? A. They result in less transparency in ensuring ethical corporate governance. B. They encourage greater accountability for financial stewardship. C. They result in a lesser emphasis to prevent any financial misconduct. D. They do not impact executives, boards, and internal audits.

B. They encourage greater accountability for financial stewardship.

. Which of the following is true of excessive compensation packages? A. When executive compensation is tied to stock price, executives have a strong incentive to focus on long-term corporate interests rather than short-term stock value. B. When huge amounts of compensation depend on quarterly earnings reports, there is a strong incentive to manipulate those reports in order to achieve the money. C. Economic fairness and personal morality always exists in executives receiving lofty compensation packages. D. Excessive compensation packages serve corporate interests when they provide an incentive that is not based on executive performance or accomplishments.

B. When huge amounts of compensation depend on quarterly earnings reports, there is a strong incentive to manipulate those reports in order to achieve the money.

Identify the gatekeepers who function as intermediaries between a company's stockholders and its executives. A. Accountants B. Auditors C. Board of directors D. Financial analysts

C. Board of directors

Which of the following elements of the Committee of Sponsoring Organizations refers to policies and procedures that support the cultural issues such as integrity, ethical values, competence, philosophy, and operating style? A. Ongoing monitoring B. Information and communications C. Control activities D. Risk assessment

C. Control activities

Which of the following statements is true of Section 407 of the Sarbanes-Oxley Act? A. It mandates that all members of a public company audit committee must be independents. B. It requires that management file an internal control report with its annual report each year. C. It addresses the disclosure of audit committee financial expert. D. It outlines the codes of ethics for senior financial officers.

C. It addresses the disclosure of audit committee financial expert.

Which of the following statements is true of the Committee of Sponsoring Organizations? A. It improves financial reporting through a combination of controls and governance standards called the External Control—Integrated Framework. B. It is an external mechanism that seeks to ensure ethical corporate governance. C. It describes control as encompassing those elements of an organization that, taken together, support people in the achievement of an organization's objectives. D. It replaces the Sarbanes-Oxley Act to ensure ethical corporate governance.

C. It describes control as encompassing those elements of an organization that, taken together, support people in the achievement of an organization's objectives.

Which of the following statements is true of the Sarbanes-Oxley Act? A. It is also known as the Financial Services Modernization Act of 2002. B. It is enforced by the Financial Accounting Standards Board. C. It was passed by Congress because corporate boards failed to police themselves. D. It fails to provide oversight in terms of direct lines of accountability and responsibility.

C. It was passed by Congress because corporate boards failed to police themselves.

Which of the following is an internal mechanism that seeks to ensure ethical corporate governance? A. European Union 8th Directive B. The Sarbanes-Oxley Act C. The COSO framework D. European Union 7th Directive

C. The COSO framework

Which of the following statements is true of additional ethical responsibilities board members should have beyond legal obligations? A. They should maintain closed conversations within the firm. B. They should refrain from providing oversight. C. They should be critical in their inquiries about corporate vulnerabilities. D. They should pay out a significant amount of the company's sustainable growth dollars to its chief executives in compensation

C. They should be critical in their inquiries about corporate vulnerabilities.

A _____ exists where a person holds a position of trust that requires that he exercise judgment on behalf of others, but where his personal interests conflict with those of others. A. duty of care B. community of interest C. conflict of interest D. duty of loyalty

C. conflict of interest

Tom, an employee of Electronixx, adjusted credits and debits of the company's ledger to show high profits. He also created false documents, underreported the company's income, and evaded paying taxes for a year. Tom can be convicted for _____. A. unethical insider trading B. conflicts of interest in corporate governance C. conflicts of interest in accounting D. unfair executive excessive compensation

C. conflicts of interest in accounting

Misappropriation of proprietary knowledge is an example of _____. A. corporate espionage B. asset overstating C. insider trading D. inventory theft

C. insider trading

Gatekeepers are professionals who: A. decide the board members of a company. B. hold private inside information about a company. C. serve as intermediaries between market participants. D. are employed by the government to ensure fair marketplace activities.

C. serve as intermediaries between market participants.

Which of the following duties of board members suggests that conflicts of interest are always to be resolved in favor of the corporation? A. Duty of care B. Duty of good faith C. Duty of candor D. Duty of loyalty

D. Duty of loyalty

Which of the following statements is true of conflicts of interests? A. Self-interest makes it easy for individuals to fulfill their gatekeeper duties. B. Legal protection cannot shield professionals from conflicts of interests. C. Cross-selling of consulting services reduces conflicts of interests. D. Excessive executive compensation involves conflicts of interests.

D. Excessive executive compensation involves conflicts of interests.

Which of the following statements is true of the Committee of Sponsoring Organizations standards for internal controls? A. It prohibited various forms of professional services that are determined to be consulting rather than auditing. B. It ensured ethical corporate governance by establishing regulations enforced by laws. C. It was passed by the U.S. Congress as a response to the string of corporate scandals that occurred since the beginning of the millennium. D. It moved audit, compliance, and governance from a numbers orientation to concern for the organizational environment.

D. It moved audit, compliance, and governance from a numbers orientation to concern for the organizational environment.

In the context of elements of the Committee of Sponsoring Organizations, which of the following statements is true of control environment? A. It focuses on uncovering vulnerabilities. B. It focuses on providing assessment capabilities. C. It addresses the risks that may hinder the achievement of corporate objectives. D. It sets the tone or culture of a firm.

D. It sets the tone or culture of a firm.

Which of the following elements of the Committee of Sponsoring Organizations provides assessment capabilities and uncovers vulnerabilities? A. Risk assessment B. Information and communications C. Control activities D. Ongoing monitoring

D. Ongoing monitoring

Which of the following provisions of the Sarbanes-Oxley Act addresses the management assessment of internal controls? A. Section 201 B. Section 301 C. Section 307 D. Section 404

D. Section 404

According to Kevin Bahr, which of the following is a cause for conflicts in the financial markets? A. The independence and expertise of audit committees B. The presence of shareholder activism C. Long-term executive greed versus short-term shareholder wealth D. Self-regulation of the accounting profession

D. Self-regulation of the accounting profession

Identify the role of analysts as "gatekeepers." A. They function as intermediaries between a company's stockholders and its executives. B. They verify a company's financial statements. C. They ensure that decisions and transactions conform to the law. D. They evaluate a company's financial prospects or creditworthiness.

D. They evaluate a company's financial prospects or creditworthiness.

Section 307 of the Sarbanes-Oxley Act requires: A. disclosure of audit committee financial expert. B. management assessment of internal controls. C. corporates to disclose codes of ethics for senior financial officers. D. corporate lawyers to report concerns of wrongdoing if not addressed.

D. corporate lawyers to report concerns of wrongdoing if not addressed.

A professional is said to have _____ if he has a professional and ethical obligation to clients rooted in trust that overrides his personal interests. A. statutory duties B. executive rights C. creditor claims D. fiduciary duties

D. fiduciary duties

COSO is one of the first efforts to address corporate culture in a quasi-regulatory framework in recognition of its significant impact on the satisfaction of organizational objectives. True or false

True

In terms of ethical theory, lofty compensation packages have a utilitarian function when they act as incentives for executives to produce greater overall results. True or false

True

One of the fastest ways to increase stock price is through layoffs of employees. True or false

True

Since audits are paid for by audited clients, there is an inherent conflict found in that financial arrangement. True or false

True

The COSO controls and the Sarbanes-Oxley requirements must be supported by a culture of accountability. True or false

True

A board has no right to prohibit actions to protect the long-term sustainability of a firm. True or false

false

A board member has the right to use information obtained through her or his position as a board member for personal gain. True or false

false

Financial analysts rely on gatekeepers but are not gatekeepers themselves. True or false

false

Insider trading is considered patently fair and ethical because it encourages employees to work hard to get access to company information. True or false

false

Risk assessment and ongoing monitoring are elements that comprise the control structure of the Sarbanes-Oxley Act. True or false

false

Risk assessment provides assessment capabilities to uncover vulnerabilities of a firm. True or false

false

While the Sarbanes-Oxley Act is an internal mechanism to ensure ethical corporate governance, the Committee of Sponsoring Organizations (COSO) is an external mechanism. True or false

false

A large boost in share price increases a firm's equity leverage for external expansion. True or false

true

The Sarbanes-Oxley Act is intended to provide protection where oversight did not previously exist. True or false

true

The most basic ethical issue facing professional gatekeepers and intermediaries in business contexts involves conflicts of interest. True or false

true