Accounting Ethics

1. 2 Principle Problems
   1. Tunneling

      Annotations:

      • Definition: stealing resources from the company.
   2. Shirking

      Annotations:

      • Not meeting the responsibilities of position.
2. Solutions
   1. Strong BoD
   2. U.S.
      1. Independent Audit Committees
      2. SOX Committes
         1. Nominating

            Annotations:

            • Usually composed by 3-5 members responsible for the quality of financial reporting
         2. Audit
         3. Compenstion
         4. Risk Management

            Annotations:

            • Are now becoming popular
      3. Inherent Conflict of Interest: CEO on Board, CEO Paid by Board
   3. Germany
      1. Board of Community Supervisors
   4. Japan
      1. Kanayaku (Gov't. Auditors)
   5. Market for Corporate Control

      Annotations:

      • Takeovers by private equity or activist shareholders. The takeover facilitates the removal of bad mangers.

Annotations:

• Multiple Stakeholders, not just Shareholders.

Annotations:

• Managers know more information than shareholders.

1. Section 922
   1. Whistleblower=Anyone w/ information
   2. Reward/Commission

      Annotations:

      • Based on having original information that leads to a successful judicial or administrative action.
      1. Between 10-30% of Sanction
      2. Some Accountants not eliglbe
         1. Internal Compliance/Audit Responsibilities
            1. EXCEPTION: Disclosure to SEC prevent substantial public injury
2. Conflict Minerals 3TG

   Annotations:

   • Reporting of sources of Tin, Tungsten, Tantalum and Gold. The bill act aims to prevent the use of conflict minerals in African mines ran by illegal owner or warlords. 

1. Employees are Protected

1. Reasonable Assurance of Financial Mistatements

1. Financial Statement Fraud
2. Misappropriation of Assets (Stealing)

1. Illegal Acts
   1. Legality determined by Lawyers and Courts
   2. Inform Management/Legal Counsel
      1. Audit Committee
   3. Obtain Understanding of effect of FS
   4. Disclosure
      1. Change Auditor
      2. Successor Auditor Request
      3. Subpoena
      4. Gov't. Funding

1. Breach of Contract
   1. Client Suit
2. Defenses
   1. No Duty Owed
   2. No Loss Suffered
   3. 3rd Loss Due to other events
   4. 3rd Party Neglience
   5. Auditor not Neglient
   6. Statue of Limitations
3. Tort Action: No Due Care
   1. Investor, Creditors, Gov't.
4. Common Law
   1. Fraud
      1. Legal Liability = Everyone
      2. False Representation
         1. Scienter - Intent to deceive
   2. Neglience
   3. Constructive Fraud/Gross Neglience
5. Statutory Law
   1. PSLRA (1995)
      1. Proportionate Liability
         1. Limited to extent of contribution
            1. Exception: Knowingly issued clean opinion w/ M-FS
      2. Required: Procedures to detect Direct, Material illegal acts effects on FS
      3. Must Inform Audit Committee
      4. Board Reports w/i 1 Day otherwise CPA must report to SEC
   2. 1933 SEC Act
      1. Registration Statements
         1. Liable for MS or Omission on IPOs
            1. Willful conduct Criminal
               1. Anyone can Sue auditor
   3. 1934 SEC Act
      1. On-going Reporting
         1. Rule 10/10b-5
            1. Fraud in connection w/ Securities Sales
               1. Scienter important but can be Constructive Farud

1. Earnings Guidance must be public

1. Compensation linked to Earnings
2. Need to raise capital(Debt or Equity)
3. Positioning for Takeover/Merger

1. Yes
   1. Stable, Predictable Earnings
   2. Image of Stable Financial Assets
   3. Volatility=Noise
2. "Within GAAP," Not Really
3. No
   1. Information in Volatility
4. Mechanisms
   1. Biased Estimates
   2. Discretionary Accruals
   3. Transaction Timing

1. Comfortable Workplace

1. Uncomfortable Workplace

1. IFRS

1. GAAP

1. Not B&W, Both systems have both
2. Substance vs. Form
3. Differences in litigation environment
   1. U.S High Probability of Suit
      1. Inherent in Legal System
4. "Condorsement"
   1. Convergence to IFRS vs. Endorsement of IFRS

1. Obligation to FS Users
   1. Overstated Inventory/AR

1. Earnings Management/Quality
   1. Chainsaw Al
      1. High Risk Reputation
         1. Earnings based Compensation
   2. Cookie-Jar Reserves
      1. Used to inflate income
   3. Channel Stuffing
      1. Bill-and-Hold Transactions
         1. Receivables grew faster than Sales

1. India
   1. Fictitious Sales & Cash
      1. Pw India Grossly Neglient
      2. Raju greater than weak BoD
2. U.S.
   1. ADS Listed
   2. PwC U.S. warned Pw INdia
      1. PwC claims independence from Pw India

1. PTIN/Signer

   Annotations:

   • This can be a: Enrolled Agent CPA Enrolled Actuary or Retirement Planner It can also just be someone who registers with IRS without any particular background. 
   1. Individually Responsible, when preparing a significant portion of return

1. 40% of Underpayment

1. Circular 230
   1. Must
      1. Furnish any information
      2. Not unreasonably delay any matter
   2. Cannot
      1. Accept help from: Anyone disbarred or Suspended or former IRS employee
      2. Charge 'unconscionable' fee or contingent fee in certain situations
      3. Use false or misleading advertising
2. SSTS-1
   1. Tax Return Positions
      1. Must have good faith belief of success
         1. More likely than not 51% Authorities supporting position 40% Realistic Probability 33%
3. SSTS-2
   1. Answers to Questions
      1. May recommend unrealistic position
         1. Reasonable basis
         2. No higher standard
      2. Tax Shelter List
         1. Substantially Similar = Not reasonably-based
      3. Interpretation
         1. Taxpreparers advance efforts of taxpayers to not pay more than they owe.