Chapter 2

Chapter 10 - Ethical Decision Making: Corporate Governance Accounting and Finance
Chapter 10
Ethical Decision Making: Corporate Governance Accounting and Finance
True / False Questions
1. The Enron case, including the demise of Arthur Andersen, "has wreaked more havoc on the
accounting industry than any other case in U.S. history."
True False
2. Attorneys rely on gatekeepers, but they are not gatekeepers themselves.

True False
3. Auditors verify a company's financial statements so that investors' decisions are free from
fraud and deception.
True False
4. Attorneys function as intermediaries between a company's stockholders and its executives

and should guarantee that executives act on behalf of the stockholders' interests.
True False
5. As long as auditors are paid by clients on whom they are supposed to report, there will
always be an apparent conflict of interest between their duties as auditors and their personal
financial interests.
True False
6. The Public Accounting Reform and Investor Protection Act of 2002 is commonly known as
the Sarbanes-Oxley Act.
True False
10-1
7. Section 201 of the Sarbanes-Oxley Act requires lawyers to report concerns of wrongdoing
if not addressed.
True False
8. Section 406 of the Sarbanes-Oxley Act requires that management file an internal control
report with its annual report each year in order to delineate how management has established
and maintained effective internal controls over financial reporting.
True False
9. One of the most significant benefits of the Sarbanes-Oxley Act is that it imposes minimal
financial costs on the firm.
True False
10. While the Sarbanes-Oxley Act is an external mechanism that seeks to ensure ethical
corporate governance, the Committee of Sponsoring Organizations (COSO) is an internal
mechanism.
True False
11. Control environment are policies and procedures that support the control activities of a
firm.
True False
12. Control environment cannot refer to concrete elements such as the division of authority,
reporting structures, roles and responsibilities, the presence of a code of conduct, and a
reporting structure. These are referred to by control activities.
True False
10-2
13. The duty of good faith requires board members to be faithful to the organization's
mission.
True False
14. The Federal Sentencing Guidelines (FSG) suggests that a board exercise ‘reasonable
oversight' with respect to the implementation and effectiveness of the ethics/compliance
program.
True False
15. The American Institute of Certified Public Accountants' (AICPA) Code of Professional
Conduct relies on specific rules rather than the judgment of accounting professionals, while
carrying out their duties.
True False
16. The definition of insider trading is trading by shareholders who hold private inside
information that would materially impact the value of the stock and that allows them to
benefit from buying or selling stock.
True False
10-3
Multiple Choice Questions
17. Which of the following rely on gatekeepers and do not assume their role?
A. Bankers
B. Auditors
C. Accountants
D. Financial analysts
18. Which of the following is not a gatekeeper role?

A. To ensure that those who enter into the marketplace are playing by the rules.
B. To ensure that those who enter into the marketplace are conforming to the very conditions
that ensure the market functions as it is supposed to function.
C. To act as intermediaries, acting between the various parties in the market.
D. To punish the individuals or parties who break the rules of the market.
19. Which of the following is a function of auditors as gatekeepers?

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

creditworthiness, so that banks and investors can make informed decisions.
A. Accountants
B. Attorneys
C. Auditors
D. Analysts
10-4
21. Identify the gatekeepers who ensure that decisions and transactions conform to the law.
A. Accountants
B. Attorneys
C. Auditors
D. Analysts
22. Identify the gatekeepers who function as intermediaries between a company's stockholders
and its executives.
A. Attorneys
B. Auditors
C. Board of directors
D. Analysts
23. Identify the gatekeepers who should guarantee that executives act on behalf of the
stockholders' interests.
A. Attorneys
B. Board of directors
C. Auditors
D. Analysts
24. When professionals have a professional and ethical obligation to their clients, duties that
override their own personal interests, they are said to have:
A. statutory duties.
B. executive rights.
C. creditor claims.
D. fiduciary duties.
10-5
25. Which of the following is one of the factors that make it difficult for individuals to fulfill
their gatekeeper duties?
A. Law
B. Self-interest
C. Client specifications
D. Market regulations
26. Changes within the accounting industry arising from the consolidation of major firms and
_____ of services such as consulting within single firms have virtually institutionalized
conflicts of interest.
A. cross-selling
B. outsourcing
C. higher taxation
D. purchasing
27. A large boost in share price—even for the short term—boosts a firm's equity leverage for
external expansion. It can also serve as an effective defense to:
A. hostile takeovers.
B. government regulations.
C. executive compensation.
D. litigation.
10-6
28. Identify the correct statement about the Sarbanes-Oxley Act.

A. It is also known as the Financial Services Modernization Act.
B. It is enforced by the Financial Accounting Standards Board (FASB).
C. It was passed because reliance on corporate boards to police themselves did not seem to be
working.
D. This act seeks instead to provide oversight in terms of direct lines of accountability and
responsibility.
29. Which of the following provisions of the Sarbanes-Oxley Act prohibits various forms of
professional services that are determined to be consulting rather than auditing?
A. Section 201
B. Section 301
C. Section 307
D. Section 404
30. Section 201 of the Sarbanes-Oxley Act addresses the:

A. rules of professional responsibility for attorneys.
B. codes of ethics for senior financial officers.
C. management assessment of internal controls.
D. services outside the scope of auditors.
10-7
31. Which of the following provisions of the Sarbanes-Oxley Act mandates majority of
independents on any board (and all on audit committee) and total absence of current or prior
business relationships?
A. Section 407
B. Section 301
C. Section 406
D. Section 307

33. Which of the following provisions of the Sarbanes-Oxley Act requires lawyers to report
concerns of wrongdoing if not addressed?
A. Section 407
B. Section 301
C. Section 406
D. Section 307

10-8
35. Which of the following provisions of the Sarbanes-Oxley Act requires that management
file an internal control report with its annual report each year in order to delineate how
management has established and maintained effective internal controls over financial
reporting?
A. Section 201
B. Section 301
C. Section 307
D. Section 404


A. disclosure of audit committee financial expert.
C. rules of professional responsibility for attorneys.
10-9
38. Which of the following statements is true about Committee of Sponsoring Organizations
(COSO)?
A. It is an obligatory collaboration designed to improve financial reporting through a
combination of controls and governance standards.
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 the organization's objectives."
D. It was established in 1985 by five of the major professional accounting and finance
associations to challenge the Sarbanes-Oxley Act.
39. Which of the following elements of COSO is responsible for influencing the control
consciousness of its people?
A. Ongoing monitoring
B. Information and communications
C. Risk assessment
D. Control environment
40. Which of the following elements of COSO are policies and procedures that support the
control environment?
C. Control activities
D. Risk assessment
10-10
41. Which of the following elements of COSO is directed at supporting the control
environment through fair and truthful transmission of information?
A. Risk assessment
D. Ongoing monitoring
42. Which of the following elements of COSO provides assessment capabilities and uncovers
vulnerabilities?
A. Risk assessment
43. The duty of care involves the exercise of reasonable care by a board member to ensure
that:
A. they never use information obtained through their position as a board member for personal
gain, but instead act in the best interests of the organization.
B. 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.
C. they do not act in a way that is inconsistent with the central goals of the organization.
D. they give undivided allegiance when making decisions affecting the organization.
44. 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
10-11
45. Identify the duty of obedience that requires board members to be faithful to the
organization's mission.
A. Duty of care
C. Duty of candor
D. Duty of loyalty
46. 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
C. Duty of candor
D. Duty of loyalty
47. Which of the following legal duties suggests that a board member may never use
information obtained through her or his position as a board member for personal gain, but
instead must act in the best interests of the organization?
A. Duty of loyalty
B. Duty of candor
C. Duty of good faith
D. Duty of care
10-12
48. According to Bill George, the independent directors should meet regularly in executive
sessions to:
A. be selected based not only on their experience or the role they hold in other firms but also
for their value structures.
B. seek external guidance on executive compensation.
C. preserve the authenticity and credibility of their communications.
D. provide oversight and to control management through appropriate governance processes.
49. The _____ relies on the judgment of accounting professionals in carrying out their duties
rather than stipulating specific rules.
A. American Accounting Association
B. American Institute of Certified Public Accountants' (AICPA) Code of Professional
Conduct
C. Securities and Exchange Commission
D. Institute of Internal Auditors
10-13
Fill in the Blank Questions
50. The role of " _____ " or "watchdogs" is to ensure that those who enter into the
marketplace are playing by the rules and conforming to the very conditions that ensure the
market functions as it is supposed to function.
________________________________________
51. A(n) _____ exists where a person holds a position of trust that requires that she or he
exercise judgment on behalf of others, but where her or his personal interests and/or
obligations conflict with those of others.
________________________________________
52. If we recognize that the gatekeeper function as necessary for the very functioning of
economic markets, and if we also recognize that self-interest can make it difficult for
individuals to fulfill their gatekeeper duties, then _____ has a responsibility to create
institutions and structures that will minimize these conflicts.
________________________________________
53. The Public Accounting Reform and Investor Protection Act of 2002 is commonly known
as the _____.
________________________________________
10-14
54. Section 201 of the Sarbanes-Oxley Act prohibits various forms of professional services
that are determined to be consulting rather than _____.
________________________________________
55. _____ is a voluntary collaboration designed to improve financial reporting through a

combination of controls and governance standards called the Internal Control—Integrated
Framework.
________________________________________
56. Control activities are policies and procedures that support the ____________.
________________________________________
57. The COSO standards for internal controls moved audit, compliance, and governance from
a(n) _____ to concern for the organizational environment.
________________________________________
58. The duty of good faith is one of _____, which requires board members to be faithful to the
________________________________________
59. In order to prevent accountants from being put into conflicts, the _____ publishes
professional rules.
________________________________________
60. Misappropriation of _____ undermines the necessary trust for the proper functioning of a
firm and is unfair to others who buy the stock.
________________________________________
10-15
Essay Questions
61. Explain the importance of gatekeepers.
62. List the responsibilities of gatekeepers. Describe briefly, the most important ethical
dilemma faced by these professionals.
63. Explain how conflict of interests can arise in a profession. Explain the ethical duties
regarding such professionals.
10-16
64. Briefly state the requirements of the Sarbanes-Oxley Act. On which aspect has it been
criticized?
65. List the provisions under the Sarbanes-Oxley act that have proved to have the most
significant impact on corporate governance and boards.
66. What is the Committee of Sponsoring Organizations (COSO)? List the control structure
elements.
10-17
67. Explain the control environment.
68. Enumerate upon the responsibilities of the Committee of Sponsoring Organizations

(COSO). Explain Enterprise Risk Management—Integrated Framework.
69. Explain the duties of board members.
10-18
70. Explain the responsibilities of the Federal Sentencing Guidelines.
71. Why is trust so very important in the financial profession?
72. Define accounting. What is its importance?
73. List the various types of ethical issues and potentials for conflict surrounding accounting
practices, which go beyond merely combining services.
10-19
74. Why is the convergence between the International Financial Reporting Standards and the
GAAP difficult?
75. According to Kevin Bahr, how can conflicts arise between services offered by public
accounting firms?
76. According to Kevin Bahr, how can executive compensation schemes cause conflict?
10-20
Chapter 10 Ethical Decision Making: Corporate Governance Accounting and

Finance Answer Key
True / False Questions
1. (p. 531) The Enron case, including the demise of Arthur Andersen, "has wreaked more havoc
on the accounting industry than any other case in U.S. history."
TRUE
The Enron case "has wreaked more havoc on the accounting industry than any other case in
U.S. history," including the demise of Arthur Andersen.
AACSB: Analytic
BT: Easy
Difficulty: Easy
Learning Objective: 10-01
Topic: Professional Duties and Conflicts of Interest
2. (p. 531) Attorneys rely on gatekeepers, but they are not gatekeepers themselves.
FALSE
Several important business professions, for example, attorneys, auditors, accountants, and
financial analysts function as gatekeepers.
AACSB: Analytic
BT: Easy
Difficulty: Easy
10-21
3. (p. 532) Auditors verify a company's financial statements so that investors' decisions are free
from fraud and deception.
TRUE
All the participants in the market, especially investors, boards, management, and bankers, rely
on gatekeepers. Auditors verify a company's financial statements so that investors' decisions
are free from fraud and deception.
AACSB: Analytic
BT: Easy
Difficulty: Easy
4. (p. 532) Attorneys function as intermediaries between a company's stockholders and its
executives and should guarantee that executives act on behalf of the stockholders' interests.
FALSE
Board of directors functions as intermediaries between a company's stockholders and its

executives and should guarantee that executives act on behalf of the stockholders' interests.
AACSB: Analytic
BT: Easy
Difficulty: Easy
5. (p. 535) As long as auditors are paid by clients on whom they are supposed to report, there
will always be an apparent conflict of interest between their duties as auditors and their
personal financial interests.
TRUE
As long as auditors are paid by the clients on whom they are supposed to report, there will
always be an apparent conflict of interest between their duties as auditors and their personal
financial interests.
AACSB: Analytic
BT: Understand
Difficulty: Medium
10-22
6. (p. 537) The Public Accounting Reform and Investor Protection Act of 2002 is commonly
known as the Sarbanes-Oxley Act.
TRUE
Because reliance on corporate boards to police themselves did not seem to be working,
Congress passed the Public Accounting Reform and Investor Protection Act of 2002,
commonly known as the Sarbanes-Oxley Act, which is enforced by the Securities and
Exchange Commission (SEC).
AACSB: Analytic
BT: Remember
Difficulty: Easy
Topic: The Sarbanes-Oxley Act of 2002
7. (p. 538) Section 201 of the Sarbanes-Oxley Act requires lawyers to report concerns of
wrongdoing if not addressed.
FALSE
Section 307 of the Sarbanes-Oxley Act requires lawyers to report concerns of wrongdoing if
not addressed.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-23
8. (p. 538) Section 406 of the Sarbanes-Oxley Act requires that management file an internal
control report with its annual report each year in order to delineate how management has
established and maintained effective internal controls over financial reporting.
FALSE
Section 404 of the Sarbanes-Oxley Act requires that management file an internal control
report with its annual report each year in order to delineate how management has established
and maintained effective internal controls over financial reporting.
AACSB: Analytic
BT: Remember
Difficulty: Easy
9. (p. 538) One of the most significant benefits of the Sarbanes-Oxley Act is that it imposes
minimal financial costs on the firm.
FALSE
One of the most significant criticisms of the Sarbanes-Oxley Act is that it imposes
extraordinary financial costs on the firms.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-24
10. (p. 539) While the Sarbanes-Oxley Act is an external mechanism that seeks to ensure ethical
corporate governance, the Committee of Sponsoring Organizations (COSO) is an internal
mechanism.
TRUE
Sarbanes-Oxley and the European Union 8th Directive are external mechanisms that seek to
ensure ethical corporate governance, but there are internal mechanisms as well. One way to
ensure appropriate controls within the organization is to utilize a framework advocated by the
Committee of Sponsoring Organizations (COSO).
AACSB: Analytic
BT: Remember
Difficulty: Easy
Topic: The Internal Control Environment
11. (p. 539) Control environment are policies and procedures that support the control activities of
a firm.
FALSE
Control activities are policies and procedures that support the control environment of a firm.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-25
12. (p. 539) Control environment cannot refer to concrete elements such as the division of
authority, reporting structures, roles and responsibilities, the presence of a code of conduct,
and a reporting structure. These are referred to by control activities.
FALSE
Control environment can refer to more concrete elements (that can better be addressed in an
audit) such as the division of authority, reporting structures, roles and responsibilities, the
presence of a code of conduct, and a reporting structure.
AACSB: Analytic
BT: Understand
Difficulty: Medium
13. (p. 541) The duty of good faith requires board members to be faithful to the organization's
mission.
TRUE
The duty of good faith is one of obedience, which requires 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.
AACSB: Analytic
BT: Remember
Difficulty: Easy
Topic: Legal Duties of Board Members
10-26
14. (p. 542) The Federal Sentencing Guidelines (FSG) suggests that a board exercise ‘reasonable
oversight' with respect to the implementation and effectiveness of the ethics/compliance
program.
TRUE
The Federal Sentencing Guidelines (FSG) also suggests that the board exercise "reasonable
oversight" with respect to the implementation and effectiveness of the ethics/compliance
program by ensuring that the program has adequate resources, appropriate level of authority,
and direct access to the board.
AACSB: Analytic
BT: Remember
Difficulty: Easy
15. (p. 546) The American Institute of Certified Public Accountants' (AICPA) Code of
Professional Conduct relies on specific rules rather than the judgment of accounting
professionals, while carrying out their duties.
FALSE
The American Institute of Certified Public Accountants' (AICPA) Code of Professional

Conduct relies on the judgment of accounting professionals in carrying out their duties rather
than stipulating specific rules.
AACSB: Analytic
BT: Remember
Difficulty: Medium
Topic: Conflicts of Interest in Accounting and the Financial Markets
10-27
16. (p. 553) The definition of insider trading is trading by shareholders who hold private inside
benefit from buying or selling stock.
TRUE
The definition of insider trading is trading by shareholders who hold private inside
benefit from buying or selling stock. Illegal insider trading also occurs when corporate
insiders provide "tips" to family members, friends, or others and those parties buy or sell the
company's stock based on that information.
AACSB: Analytic
BT: Remember
Difficulty: Easy
Topic: Insider Trading
Multiple Choice Questions
17. (p. 531-532) Which of the following rely on gatekeepers and do not assume their role?
A. Bankers
B. Auditors
C. Accountants
D. Financial analysts
financial analysts, can be thought of as "gatekeepers" or "watchdogs" in that their role is to
ensure that those who enter into the marketplace are playing by the rules and conforming to
the very conditions that ensure the market functions as it is supposed to function. All the
participants in the market, especially investors, boards, management, and bankers, rely on
these gatekeepers.
AACSB: Analytic
BT: Remember
Difficulty: Medium
Learning Objective: 10-01; 10-02
10-28
18. (p. 531) Which of the following is not a gatekeeper role?

A. To ensure that those who enter into the marketplace are playing by the rules.
B. To ensure that those who enter into the marketplace are conforming to the very conditions
that ensure the market functions as it is supposed to function.
C. To act as intermediaries, acting between the various parties in the market.
D. To punish the individuals or parties who break the rules of the market.
The role of professional "gatekeepers" or "watchdogs" is to ensure that those who enter into
the marketplace are playing by the rules and conforming to the very conditions that ensure the
market functions as it is supposed to function. These professions can also be understood as
intermediaries, acting between the various parties in the market.
AACSB: Analytic
BT: Understand
Difficulty: Medium
19. (p. 532) Which of the following is a function of auditors as gatekeepers?

A. To verify a company's financial statements so that investors' decisions are free from fraud
and deception.
B. To evaluate a company's financial prospects or creditworthiness, so that banks and
C. To ensure that decisions and transactions conform to the law.
D. To function as intermediaries between a company's stockholders and its executives.
Auditors verify a company's financial statements so that investors' decisions are free from
fraud and deception.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-29
20. (p. 532) Identify the gatekeepers who evaluate a company's financial prospects or
creditworthiness, so that banks and investors can make informed decisions.
A. Accountants
B. Attorneys
C. Auditors
D. Analysts
Analysts evaluate a company's financial prospects or creditworthiness, so that banks and

AACSB: Analytic
BT: Remember
Difficulty: Easy
21. (p. 532) Identify the gatekeepers who ensure that decisions and transactions conform to the
law.
A. Accountants
B. Attorneys
C. Auditors
D. Analysts
Attorneys ensure that decisions and transactions conform to the law.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-30
22. (p. 532) Identify the gatekeepers who function as intermediaries between a company's
stockholders and its executives.
A. Attorneys
B. Auditors
C. Board of directors
D. Analysts
Boards function as intermediaries between a company's stockholders and its executives and
should guarantee that executives act on behalf of the stockholders' interests.
AACSB: Analytic
BT: Remember
Difficulty: Easy
23. (p. 532) Identify the gatekeepers who should guarantee that executives act on behalf of the
stockholders' interests.
A. Attorneys
B. Board of directors
C. Auditors
D. Analysts
Boards function as intermediaries between a company's stockholders and its executives and
should guarantee that executives act on behalf of the stockholders' interests.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-31
24. (p. 532) When professionals have a professional and ethical obligation to their clients, duties
that override their own personal interests, they are said to have:
A. statutory duties.
B. executive rights.
C. creditor claims.
D. fiduciary duties.
Conflicts of interest can also arise when a person's ethical obligations in her or his
professional duties clash with personal interests. Such professionals are said to have fiduciary
duties —a professional and ethical obligation—to their clients, duties that override their own
personal interests.
AACSB: Analytic
BT: Remember
Difficulty: Easy
25. (p. 533-535) Which of the following is one of the factors that make it difficult for individuals
to fulfill their gatekeeper duties?
A. Law
B. Self-interest
C. Client specifications
D. Market regulations
Real and complex conflicts can exist between professional duties and a professional's self-
interest. If we recognize that the gatekeeper function is necessary for the very functioning of
individuals to fulfill their gatekeeper duties, then society has a responsibility to create
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-32
26. (p. 536) Changes within the accounting industry arising from the consolidation of major
firms and _____ of services such as consulting within single firms have virtually
institutionalized conflicts of interest.
A. cross-selling
B. outsourcing
C. higher taxation
D. purchasing
Changes within the accounting industry stemming from the consolidation of major firms and
avid "cross-selling" of services such as consulting and auditing within single firms have
virtually institutionalized conflicts of interest.
AACSB: Analytic
BT: Remember
Difficulty: Easy
27. (p. 536) A large boost in share price—even for the short term—boosts a firm's equity
leverage for external expansion. It can also serve as an effective defense to:
A. hostile takeovers.
B. government regulations.
C. executive compensation.
D. litigation.
A large boost in share price—even for the short term—serves as an effective defense to
hostile takeovers and boosts a firm's equity leverage for external expansion.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-33
28. (p. 537) Identify the correct statement about the Sarbanes-Oxley Act.
A. It is also known as the Financial Services Modernization Act.
B. It is enforced by the Financial Accounting Standards Board (FASB).
C. It was passed because reliance on corporate boards to police themselves did not seem to be
working.
D. This act seeks instead to provide oversight in terms of direct lines of accountability and
responsibility.
AACSB: Analytic
BT: Remember
Difficulty: Medium
29. (p. 537) Which of the following provisions of the Sarbanes-Oxley Act prohibits various
forms of professional services that are determined to be consulting rather than auditing?
A. Section 201
B. Section 301
C. Section 307
D. Section 404
Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

and responsibility. The following provisions have the most significant impact on corporate
governance and boards—Section 201: Services outside the scope of auditors (prohibits
various forms of professional services that are determined to be consulting rather than
auditing).
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-34
30. (p. 537) Section 201 of the Sarbanes-Oxley Act addresses the:

governance and boards—Section 201: Services outside the scope of auditors (prohibits
various forms of professional services that are determined to be consulting rather than
auditing).
AACSB: Analytic
BT: Remember
Difficulty: Medium
31. (p. 538) Which of the following provisions of the Sarbanes-Oxley Act mandates majority of
independents on any board (and all on audit committee) and total absence of current or prior
business relationships?
A. Section 407
B. Section 301
C. Section 406
D. Section 307

governance and boards—Section 301: Public company audit committees (requires
independence), mandating majority of independents on any board (and all on audit
committee) and total absence of current or prior business relationships.
AACSB: Remember
BT: The Sarbanes-Oxley Act of 2002
Difficulty: Medium
Topic: 10-04
10-35

governance and boards—Section 307: Rules of professional responsibility for attorneys
(requires lawyers to report concerns of wrongdoing if not addressed).
AACSB: Analytic
BT: Remember
Difficulty: Medium
33. (p. 538) Which of the following provisions of the Sarbanes-Oxley Act requires lawyers to
report concerns of wrongdoing if not addressed?
A. Section 407
B. Section 301
C. Section 406
D. Section 307

governance and boards—Section 307: Rules of professional responsibility for attorneys
(requires lawyers to report concerns of wrongdoing if not addressed).
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-36

governance and boards—Section 404: Management assessment of internal controls (requires
that management file an internal control report with its annual report each year in order to
delineate how management has established and maintained effective internal controls over
financial reporting).
AACSB: Analytic
BT: Remember
Difficulty: Medium
35. (p. 538) Which of the following provisions of the Sarbanes-Oxley Act requires that
management file an internal control report with its annual report each year in order to
financial reporting?
A. Section 201
B. Section 301
C. Section 307
D. Section 404

governance and boards—Section 404: Management assessment of internal controls (requires
that management file an internal control report with its annual report each year in order to
financial reporting).
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-37

governance and boards—Section 406: Codes of ethics for senior financial officers (required).
AACSB: Analytic
BT: Remember
Difficulty: Medium
A. disclosure of audit committee financial expert.
C. rules of professional responsibility for attorneys.

governance and boards—Section 407: Disclosure of audit committee financial expert
(requires that they actually have an expert).
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-38
38. (p. 539) Which of the following statements is true about Committee of Sponsoring
Organizations (COSO)?
A. It is an obligatory collaboration designed to improve financial reporting through a
combination of controls and governance standards.
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 the organization's objectives."
D. It was established in 1985 by five of the major professional accounting and finance
associations to challenge the Sarbanes-Oxley Act.
COSO is a voluntary collaboration designed to improve financial reporting through a

Framework. COSO describes "control" as encompassing "those elements of an organization
that, taken together, support people in the achievement of the organization's objectives."
AACSB: Analytic
BT: Understand
Difficulty: Medium
39. (p. 539) Which of the following elements of COSO is responsible for influencing the control
consciousness of its people?
C. Risk assessment
D. Control environment
Control environment—the tone or culture of a firm: "the control environment sets the tone of
an organization, influencing the control consciousness of its people."
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-39
40. (p. 539) Which of the following elements of COSO are policies and procedures that support
the control environment?
D. Risk assessment
Control activities—policies and procedures that support the control environment.
AACSB: Analytic
BT: Remember
Difficulty: Easy
41. (p. 539) Which of the following elements of COSO is directed at supporting the control
environment through fair and truthful transmission of information?
A. Risk assessment
Information and communications—directed at supporting the control environment through

fair and truthful transmission of information.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-40
42. (p. 539) Which of the following elements of COSO provides assessment capabilities and
uncovers vulnerabilities?
A. Risk assessment
Ongoing monitoring—to provide assessment capabilities and to uncover vulnerabilities.
AACSB: Analytic
BT: Remember
Difficulty: Easy
43. (p. 541) The duty of care involves the exercise of reasonable care by a board member to
ensure that:
A. they never use information obtained through their position as a board member for personal
gain, but instead act in the best interests of the organization.
B. the corporate executives with whom she or he works carry out their management
C. they do not act in a way that is inconsistent with the central goals of the organization.
D. they give undivided allegiance when making decisions affecting the organization.
The 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
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-41
44. (p. 541) 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
C. Duty of candor
D. Duty of loyalty
The 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. Board
members are directed to use their "business judgment as prudent caretakers": the director is
expected to be disinterested and reasonably informed, and to rationally believe the decisions
made are in the firm's best interest. The bottom line is that a director does not need to be an
expert or actually run the company!
AACSB: Analytic
BT: Remember
Difficulty: Easy
45. (p. 541) Identify the duty of obedience that requires board members to be faithful to the
A. Duty of care
C. Duty of candor
D. Duty of loyalty
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-42
46. (p. 541) 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
C. Duty of candor
D. Duty of loyalty
The 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.
AACSB: Analytic
BT: Remember
Difficulty: Easy
47. (p. 541) Which of the following legal duties suggests that a board member may never use
information obtained through her or his position as a board member for personal gain, but
instead must act in the best interests of the organization?
A. Duty of loyalty
B. Duty of candor
C. Duty of good faith
D. Duty of care
always to be resolved in favor of the corporation. A board member may never use information
obtained through her or his position as a board member for personal gain, but instead must act
in the best interests of the organization.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-43
48. (p. 543) According to Bill George, the independent directors should meet regularly in
executive sessions to:
A. be selected based not only on their experience or the role they hold in other firms but also
for their value structures.
B. seek external guidance on executive compensation.
C. preserve the authenticity and credibility of their communications.
D. provide oversight and to control management through appropriate governance processes.
Bill George, former chairman and CEO of Medtronic and a recognized expert on governance,
contends that there are 10 basic tenets that boards should follow to ensure appropriate and
ethical governance—Executive sessions: The independent directors should meet regularly in
executive sessions to preserve the authenticity and credibility of their communications.
AACSB: Analytic
BT: Remember
Difficulty: Medium
Topic: Beyond the Law, There Is Ethics
49. (p. 546) The _____ relies on the judgment of accounting professionals in carrying out their
duties rather than stipulating specific rules.
A. American Accounting Association
B. American Institute of Certified Public Accountants' (AICPA) Code of Professional
Conduct
C. Securities and Exchange Commission
D. Institute of Internal Auditors
Accountants are governed by the American Institute of Certified Public Accountants' (AICPA)
Code of Professional Conduct. The code relies on the judgment of accounting professionals in
carrying out their duties rather than stipulating specific rules.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-44
Fill in the Blank Questions
50. (p. 531) The role of " _____ " or "watchdogs" is to ensure that those who enter into the
marketplace are playing by the rules and conforming to the very conditions that ensure the
market functions as it is supposed to function.
gatekeepers
financial analysts can be thought of as "gatekeepers" or "watchdogs" in that their role is to
the very conditions that ensure the market functions as it is supposed to function.
AACSB: Analytic
BT: Remember
Difficulty: Easy
51. (p. 532) A(n) _____ exists where a person holds a position of trust that requires that she or he
conflict of interest
A conflict of interest exists where a person holds a position of trust that requires that she or he
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-45
52. (p. 535) If we recognize that the gatekeeper function as necessary for the very functioning of
individuals to fulfill their gatekeeper duties, then _____ has a responsibility to create
society
If we recognize that the gatekeeper function is necessary for the very functioning of economic
markets, and if we also recognize that self-interest can make it difficult for individuals to
fulfill their gatekeeper duties, then society has a responsibility to create institutions and
structures that will minimize these conflicts.
AACSB: Analytic
BT: Remember
Difficulty: Medium
53. (p. 537) The Public Accounting Reform and Investor Protection Act of 2002 is commonly
known as the _____.
Sarbanes-Oxley Act
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-46
54. (p. 537) Section 201 of the Sarbanes-Oxley Act prohibits various forms of professional
services that are determined to be consulting rather than _____.
auditing
Section 201 of the Sarbanes-Oxley Act prohibits various forms of professional services that
are determined to be consulting rather than auditing.
AACSB: Analytic
BT: Remember
Difficulty: Medium
55. (p. 539) _____ is a voluntary collaboration designed to improve financial reporting through a
Framework.
Committee of Sponsoring Organizations (COSO)
Committee of Sponsoring Organizations (COSO) is a voluntary collaboration designed to

improve financial reporting through a combination of controls and governance standards
called the Internal Control—Integrated Framework.
AACSB: Analytic
BT: Remember
Difficulty: Easy
56. (p. 539) Control activities are policies and procedures that support the
____________________.
control environment
Control activities —policies and procedures that support the control environment.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-47
57. (p. 539) The COSO standards for internal controls moved audit, compliance, and governance
from a(n) _____ to concern for the organizational environment.
numbers orientation
The COSO standards for internal controls moved audit, compliance, and governance from a
numbers orientation to concern for the organizational environment.
AACSB: Analytic
BT: Remember
Difficulty: Easy
58. (p. 541) The duty of good faith is one of _____, which requires board members to be faithful
to the organization's mission.
obedience
inconsistent with the central goals of the organization.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-48
59. (p. 545) In order to prevent accountants from being put into conflicts, the _____ publishes
professional rules.
American Institute of CPAs
The ethical issues and potential for conflicts surrounding accounting practices go far beyond
merely combining services. They may include underreporting income, falsifying documents,
allowing or taking questionable deductions, illegally evading income taxes, and engaging in
fraud. In order to prevent accountants from being put in these types of conflicts, the American
Institute of CPAs publishes professional rules.
AACSB: Analytic
BT: Remember
Difficulty: Easy
60. (p. 554) Misappropriation of _____ undermines the necessary trust for the proper functioning
of a firm and is unfair to others who buy the stock.
proprietary knowledge
Insider trading may be based on a claim of unethical misappropriation of proprietary

knowledge, that is, knowledge only those in the firm should have, knowledge owned by the
firm and not to be used by abusing one's fiduciary responsibilities to the firm.
Misappropriation of this information undermines the trust necessary to the proper functioning
of a firm and is unfair to others who buy the stock.
AACSB: Analytic
BT: Understand
Difficulty: Medium
Topic: Insider Trading
10-49
Essay Questions
61. (p. 531-532) Explain the importance of gatekeepers.
It is universally recognized that markets must function within the law; they must assume full
information; and they must be free from fraud and deception. Some argue that only
government regulation can ensure that these rules will be followed. Others argue that
enforcement of these rules is the responsibility of important internal controls that exist within
market-based economic systems. Several important business professions, for example,
attorneys, auditors, accountants, and financial analysts, function in just this way.
These professions can be thought of as "gatekeepers" or "watchdogs" in that their role is to
the very conditions that ensure the market functions as it is supposed to function. Recall the
critical importance of role identities in determining ethical duties of professionals. These roles
provide a source for rules from which we can determine how professionals ought to act. These
professions can also be understood as intermediaries, acting between the various parties in the
market, and they are bound to ethical duties in this role. All the participants in the market,
especially investors, boards, management, and bankers, rely on these gatekeepers.
AACSB: Analytic
BT: Understand
Difficulty: Medium
Learning Objective: 10-01; 10-02
10-50
62. (p. 531-532) List the responsibilities of gatekeepers. Describe briefly, the most important
ethical dilemma faced by these professionals.
Gatekeepers can be understood as intermediaries, acting between the various parties in the
market, and they are bound to ethical duties in this role as well. All the participants in the
market, especially investors, boards, management, and bankers, rely on these gatekeepers.
Auditors verify a company's financial statements so that investors' decisions are free from
fraud and deception. Analysts evaluate a company's financial prospects or creditworthiness, so
that banks and investors can make informed decisions. Attorneys ensure that decisions and
transactions conform to the law. Indeed, even boards of directors can be understood in this
way. Boards function as intermediaries between a company's stockholders and its executives
and should guarantee that executives act on behalf of the stockholders' interests.
The most important ethical issue facing professional gatekeepers and intermediaries in
business contexts involves conflicts of interest. A conflict of interest exists where a person
holds a position of trust that requires that she or he exercise judgment on behalf of others, but
where her or his personal interests and/or obligations conflict with those of others.
AACSB: Analytic
BT: Understand
Difficulty: Medium
10-51
63. (p. 532-536) Explain how conflict of interests can arise in a profession. Explain the ethical
duties regarding such professionals.
Many professional gatekeepers and intermediaries are paid by the businesses over which they
keep watch, and perhaps are also employed by yet another business. Certified public
accountants (CPAs) have a professional responsibility to the public. But they work for clients
whose financial interests are not always served by full, accurate, and independent disclosure
of financial information. Even more dangerously, they work daily with and are hired by a
management team that itself might have interests that conflict with the interests of the firm
represented by the board of directors. Thus, real and complex conflicts can exist between
professional duties and a professional's self-interest.
In one sense, the ethical issues regarding such professional responsibilities are clear. Because
professional gatekeeper duties are necessary conditions for economic legitimacy, they should
trump other responsibilities to one's employer. But knowing one's duties and fulfilling those
duties are two separate issues. Agency responsibilities generate many ethical implications. If
we recognize that the gatekeeper function is necessary for the very functioning of economic
markets, and if we also recognize that it can be difficult for individuals to fulfill their
gatekeeper duties, then society has a responsibility to make changes to minimize these
conflicts. From the perspective of social ethics, certain structural changes would be an
appropriate response to the accounting scandals of recent years.
AACSB: Analytic
BT: Understand
Difficulty: Medium
64. (p. 538) Briefly state the requirements of the Sarbanes-Oxley Act. On which aspect has it
been criticized?
Sarbanes-Oxley includes requirements for certification of the documents by officers. When a

firm's executives and auditors are required to literally sign off on these statements, certifying
their veracity, fairness, and completeness, they are more likely to personally ensure their truth.
One of the most significant criticisms of the act is that it imposes extraordinary financial costs
on the firms; and the costs are apparently even higher than anticipated.
AACSB: Analytic
BT: Remember
Difficulty: Easy
10-52
65. (p. 537-538) List the provisions under the Sarbanes-Oxley act that have proved to have the
most significant impact on corporate governance and boards.
The following provisions have the most significant impact on corporate governance and
boards:
Section 201: Services outside the scope of auditors (prohibits various forms of professional
services that are determined to be consulting rather than auditing).
Section 301: Public company audit committees (requires independence), mandating majority
of independents on any board (and all on audit committee) and total absence of current or
prior business relationships.
Section 307: Rules of professional responsibility for attorneys (requires lawyers to report
concerns of wrongdoing if not addressed).
Section 404: Management assessment of internal controls (requires that management file an
internal control report with its annual report each year in order to delineate how management
has established and maintained effective internal controls over financial reporting).
Section 406: Codes of ethics for senior financial officers (required).
Section 407: Disclosure of audit committee financial expert (requires that they actually have
an expert).
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-53
66. (p. 539) What is the Committee of Sponsoring Organizations (COSO)? List the control
structure elements.
Sarbanes-Oxley and the European Union's 8th Directive are external mechanisms that seek to
ensure ethical corporate governance, but there are internal mechanisms as well. One way to
ensure appropriate controls within the organization is to utilize a framework advocated by the
Committee of Sponsoring Organizations (COSO). COSO is a voluntary collaboration
designed to improve financial reporting through a combination of controls and governance
standards called the Internal Control—Integrated Framework. COSO describes, "control" as
encompassing "those elements of an organization that, taken together, support people in the
achievement of the organization's objectives."
The elements that comprise the control structure include: (1) Control environment —the tone
or culture of a firm: "the control environment sets the tone of an organization, influencing the
control consciousness of its people"; (2) Risk assessment —risks that may hinder the
achievement of corporate objectives; (3) Control activities —policies and procedures that
support the control environment; (4) Information and communications —directed at
supporting the control environment through fair and truthful transmission of information; (5)
Ongoing monitoring —to provide assessment capabilities and to uncover vulnerabilities.
AACSB: Analytic
BT: Understand
Difficulty: Medium
67. (p. 539) Explain the control environment.
Control environment refers to cultural issues such as integrity, ethical values, competence,
philosophy, and operating style. COSO is one of the first efforts to address corporate culture
in a quasiregulatory framework in recognition of its significant impact on the satisfaction of
organizational objectives. Control environment can also refer to more concrete elements (that
can better be addressed in an audit) such as the division of authority, reporting structures,
roles and responsibilities, the presence of a code of conduct, and a reporting structure.
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-54
68. (p. 539-540) Enumerate upon the responsibilities of the Committee of Sponsoring
Organizations (COSO). Explain Enterprise Risk Management—Integrated Framework.
The COSO standards for internal controls moved audit, compliance, and governance from a
numbers orientation to concern for the organizational environment. In recognition of the
interplay between the COSO control environment and the Sarbanes-Oxley requirements, it is
critical to influence the culture in which the control environment develops in order to impact
both sectors of this environment. In fact, these shifts impact not only executives and boards;
internal audit and compliance professionals also are becoming more accountable for financial
stewardship, resulting in greater transparency, greater accountability, and a greater emphasis
on effort to prevent misconduct. In fact, all the controls one could implement have little value
if there is no unified corporate culture to support it or mission to guide it.
More recently, COSO developed a new system, Enterprise Risk Management—Integrated
Framework, to serve as a framework for management to evaluate and improve their firms'
prevention, detection, and management of risk. This system expands on the prior framework
in that it intentionally includes "objective setting" as one of its interrelated components,
recognizing that both the culture and the propensity toward risk are determined by the firm's
overarching mission and objectives. Enterprise risk management, therefore, assists an
organization or its governing body in resolving ethical dilemmas based on the firm's mission,
its culture, and its appetite and tolerance for risk.
AACSB: Analytic
BT: Understand
Difficulty: Medium
10-55
69. (p. 541) Explain the duties of board members.
The law imposes three clear duties on board members, the duties of care, good faith, and
loyalty. The 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. Directors are
permitted to rely on information and opinions only if they are prepared or presented by
corporate officers, employees, a board committee, or other professionals the director believes
to be reliable and competent in the matters presented. Board members are also directed to use
their "business judgment as prudent caretakers": the director is expected to be disinterested
and reasonably informed, and to rationally believe the decisions made are in the firm's best
interest. The bottom line is that a director does not need to be an expert or actually run the
company!
inconsistent with the central goals of the organization. Their decisions must always be in line
with organizational purposes and direction, strive towards corporate objectives, and avoid
taking the organization in any other direction.
always to be resolved in favor of the corporation. A board member may never use information
obtained through her or his position as a board member for personal gain, but instead must act
in the best interests of the organization.
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-56
70. (p. 542) Explain the responsibilities of the Federal Sentencing Guidelines.
The Federal Sentencing Guidelines (FSG), promulgated by the United States Sentencing
Commission and (since a 2005 Supreme Court decision) discretionary in nature, do offer
boards some specifics regarding ways to mitigate eventual fines and sentences in carrying out
these duties by paying attention to ethics and compliance. In particular, the board must work
with executives to analyze the incentives for ethical behavior. It must also be truly
knowledgeable about the content and operation of the ethics program. "Knowledgeable"
would involve a clear understanding of the process by which the program evolved its
objectives, its process and next steps, rather than simply the mere contents of a training
session. The FSG also suggest that the board exercise "reasonable oversight" with respect to
the implementation and effectiveness of the ethics/compliance program by ensuring that the
program has adequate resources, appropriate level of authority, and direct access to the board.
In order to ensure satisfaction of the FSG and the objectives of the ethics and compliance
program, the FSG discuss periodic assessment of risk of criminal conduct and of the
program's effectiveness. In order to assess their success, boards should evaluate their training
and development materials, their governance structure and position descriptions, their
individual evaluation processes, their methods for bringing individuals onto the board or
removing them, and all board policies, procedures, and processes, including a code of conduct
and conflicts policies. Though the above FSG recommendations seem intuitive to some
extent, see the following Reality Check for the actual numbers of firms that implement
training on these issues for their boards of directors.
AACSB: Analytic
BT: Analyze
Difficulty: Hard
10-57
71. (p. 544-545) Why is trust so very important in the financial profession?
Trust is an integral issue for all involved in the finance industry. After all, what more can an
auditor, an accountant, or an analyst offer than her or his integrity and trustworthiness? There
is no real, tangible product to sell, nor is there the ability to "try before you buy." Therefore,
treating clients fairly and building a reputation for fair dealing may be a finance professional's
greatest assets. Conflicts—real or perceived—can erode trust, and often exist as a result of
varying interests of stakeholders.
AACSB: Analytic
BT: Remember
Difficulty: Medium
72. (p. 545) Define accounting. What is its importance?
Accounting can be defined as "the process by which any business keeps track of its financial
activities by recording its debits and credits and balancing its accounts." Accounting offers us
a system of rules and principles that govern the format and content of financial statements.
Accounting, by its very nature, is a system of principles applied to present the financial
position of a business and the results of its operations and cash flows. It is hoped that
adherence to these principles will result in fair and accurate reporting of this information.
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-58
73. (p. 545) List the various types of ethical issues and potentials for conflict surrounding
accounting practices, which go beyond merely combining services.
The ethical issues and potential for conflicts surrounding accounting practices go far beyond
merely combining services. They may include underreporting income, falsifying documents,
allowing or taking questionable deductions, illegally evading income taxes, and engaging in
fraud.
AACSB: Analytic
BT: Remember
Difficulty: Easy
74. (p. 546) Why is the convergence between the International Financial Reporting Standards
and the GAAP difficult?
Beyond the prospect of the standards simply being translated appropriately and effectively,
the standards themselves can be complex, modifying the standards becomes infinitely more
complicated, small global firms may realize a greater burden than larger multinationals, and
differences in knowledge bases between countries may pose strong barriers.
AACSB: Analytic
BT: Analyze
Difficulty: Medium
75. (p. 546) According to Kevin Bahr, how can conflicts arise between services offered by public
accounting firms?
Since many public accounting firms offer consulting services to their clients, there are
conflicts in the independence of the firm's opinions and incentives to generate additional
consulting fees.
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-59
76. (p. 546-547) According to Kevin Bahr, how can executive compensation schemes cause
conflict?
Stock options and their accounting treatment remain an issue for the accounting profession
and the investment community since, though meant to be an incentive to management and
certainly a form of compensation, they are not treated as an expense on the income statement.
They also tend to place the incentives, again, on short-term growth rather than long-term
sustainability.
AACSB: Analytic
BT: Remember
Difficulty: Medium
10-60

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Chapter 10 - Ethical Decision Making: Corporate Governance Accounting and Finance

True / False Questions

2. Attorneys rely on gatekeepers, but they are not gatekeepers themselves.

4. Attorneys function as intermediaries between a company's stockholders and its executives

Multiple Choice Questions

18. Which of the following is not a gatekeeper role?

19. Which of the following is a function of auditors as gatekeepers?

20. Identify the gatekeepers who evaluate a company's financial prospects or

28. Identify the correct statement about the Sarbanes-Oxley Act.

30. Section 201 of the Sarbanes-Oxley Act addresses the:

32. Section 307 of the Sarbanes-Oxley Act addresses the:

34. Section 404 of the Sarbanes-Oxley Act addresses the:

36. Section 406 of the Sarbanes-Oxley Act addresses the:

37. Section 407 of the Sarbanes-Oxley Act addresses the:

Fill in the Blank Questions

55. _____ is a voluntary collaboration designed to improve financial reporting through a

61. Explain the importance of gatekeepers.

67. Explain the control environment.

68. Enumerate upon the responsibilities of the Committee of Sponsoring Organizations

69. Explain the duties of board members.

70. Explain the responsibilities of the Federal Sentencing Guidelines.

71. Why is trust so very important in the financial profession?

72. Define accounting. What is its importance?

Chapter 10 Ethical Decision Making: Corporate Governance Accounting and

True / False Questions

Board of directors functions as intermediaries between a company's stockholders and its

The American Institute of Certified Public Accountants' (AICPA) Code of Professional

Multiple Choice Questions

18. (p. 531) Which of the following is not a gatekeeper role?

19. (p. 532) Which of the following is a function of auditors as gatekeepers?

Analysts evaluate a company's financial prospects or creditworthiness, so that banks and

Attorneys ensure that decisions and transactions conform to the law.

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

Sarbanes-Oxley seeks instead to provide oversight in terms of direct lines of accountability

COSO is a voluntary collaboration designed to improve financial reporting through a

Control activities—policies and procedures that support the control environment.

Information and communications—directed at supporting the control environment through

Ongoing monitoring—to provide assessment capabilities and to uncover vulnerabilities.

Fill in the Blank Questions

Committee of Sponsoring Organizations (COSO) is a voluntary collaboration designed to

Insider trading may be based on a claim of unethical misappropriation of proprietary

61. (p. 531-532) Explain the importance of gatekeepers.

Sarbanes-Oxley includes requirements for certification of the documents by officers. When a

67. (p. 539) Explain the control environment.

69. (p. 541) Explain the duties of board members.

72. (p. 545) Define accounting. What is its importance?

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