ANSWERS TO REVIEW QUESTIONS
1. “Cute accounting” is stretching the form of accounting standards to the limit, regardless of the substance of the underlying business transactions or events. “Cooking the books” is fraudulent financial reporting. The Equity Funding Corporation of America fraud is significant for management accountants and financial executives because the fraud was carried out over a nine-year period by at least 10 executives of Equity, several of whom were CPAs with public accounting experience. This fraud furnished clear evidence of the need for ethics codes for management accountants and other financial executives. Four components of ethical conduct for management accountants, set forth in the IMA's Standards of Ethical Conduct for Members are competence, confidentiality, integrity, and objectivity. Fraudulent financial reporting was defined by the Treadway Commission as “intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements.” Rules 102, 201, 202, 203, 302, and 501 of the AICPA's Code of Professional Conduct apply to all members of the AICPA, including management accountants. The ethics codes of the IMA and the FEI have no specific requirements for compliance with generally accepted accounting principles. Insider trading of corporate securities is purchasing or selling a security while in possession of material, nonpublic information or communicating such information in connection with a securities transaction. No, the SEC does not accept a “good soldier” rationalization for fraudulent financial reporting, as emphasized by the SEC in AAER 93, ". . . In the Matter of Michael R. Maury," and AAER 538, ". . . In the Matter of Michael V. Barnes." The IMA's Standards of Ethical Conduct for Members requires management accountant members to avoid actual or apparent conflicts of interest and to advise all appropriate parties of any potential conflict. The FEI Code of Ethics requires FEI members to maintain the confidentiality of information acquired in the course of their work except when authorized or otherwise legally obligated to disclose it. Article IV, “Objectivity and Independence” of “Section I: Principles” of the AICPA Code of Professional Conduct acknowledges that AICPA members not in public practice cannot maintain the appearance of independence. The Public Company Accounting Oversight Board regulates the conduct of accountants both in public practice and in publicly owned business enterprises.
5. 6. 7.
Solutions Manual, Chapter 1
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SOLUTIONS TO EXERCISE
Ex. 1–1 1. 2. 3. 4. 5. 6. b a d a d b 7. c 8. b 9. a 10. a 11. d 12. b
Case 1–1 Arguments in support of the affirmative side of the debate include the following: (l) The word unswerving implies that there is never a cause for a deviation from honorable behavior by a member of the AICPA. What if the member were a victim of fraud, harassment, or other unacceptable behavior? Must members defending themselves from such indignities be precluded from “fighting fire with fire”? (2) In today's highly competitive business and professional activities, behavior deemed dishonorable by one person might not be viewed as dishonorable by another, given that there are no specific attributes associated by all persons with such behavior. Arguments in support of the negative side of the debate include the following: (l) Licensed members of a profession are expected to behave in a manner above and beyond the norm for society as a whole. (2) CPAs serve the public interest; thus, they should never engage in conduct that would harm that interest. (3) Placing personal advantage before the best interests of the client or the public would lead to a conflict of interestone of the most egregious types of unprofessional conduct by a CPA. A literal interpretation of...