Accounting and auditing

09/30/2014

Is Whistleblowing an Ethical Practice?

What Motivates a Person to Blow the Whistle on Financial Wrongdoing?
Whistleblowing has become a more accepted practice in our society in part because the Dodd-Frank
Financial Reform Act sanctions the practice under specific circumstances. The questions I address in
todays blog are: What are the values exhibited by a whistleblower? Is the would-be whistleblower an
ethical person or just someone looking for a big payday? How might we make such a determination?
The award has been described as incentivizing whistleblowing because it may encourage a disgruntled
employee to gather information about financial wrongdoing and then inform the SEC of the matter solely
because of the monetary award. The SECs whistleblower program under Dodd-Frank rewards highquality, original information that results in an SEC enforcement action with sanctions exceeding $1
million. Whistleblower awards can range from 10 percent to 30 percent of the money collected from an
enforcement action.
Individuals with internal compliance or audit responsibilities at an entity, including CPAs, who receive
information about potential violations, cannot receive whistleblower awards since it is part of
their job responsibilities to report suspicion of illegal acts to management. However, these individuals are
not excluded from receiving a whistleblower award where:
a. Disclosure to the SEC is needed to prevent substantial injury to the financial
interest of an entity or its investors,
b. The whistleblower reasonably believes the entity is impeding investigation of the
misconduct or
c. The whistleblower has first reported the violation internally and at least 120 days
have passed.
On September 23, the SEC announced an expected award of more than $30 million to a whistleblower
living in a foreign country who provided key information that led to a successful SEC enforcement action.
Previously, the biggest award ($14 million) went to a whistleblower a year ago for information that led to
an enforcement action that recovered substantial investor funds.
The $30 million award will be the largest made by the SECs whistleblower program. According to Andrew
Ceresney, Director of the SECs Division of Enforcement, This whistleblower came to us with information
about an ongoing fraud that would have been very difficult to detect. Whistleblowersshould feel similarly
incentivized to come forward with credible information about potential violations of the U.S. securities
laws.
The ethics of whistleblowing is a tricky matter. Waytz points out that whistle-blowing brings two moral
values, fairness and loyalty, into conflict. Doing what is fair or just (e.g., promoting an employee based on
talent alone) often conflicts with showing loyalty (e.g., promoting a longstanding but unskilled employee).
I would add to the analysis responsibility and accountability because these values underlie the act of
blowing the whistle. Responsible people blow the whistle when they believe more harm than good will
occur if the whistleblower stays silent. A virtuous whistleblower acts in an ethical manner if she truly
believes a responsibility exists to protect the public interest. Such a person is willing to accept the
consequences of her actions. i.e., she is accountable for her actions.
Loyalty is a powerful ethical value and may inhibit a would-be-whistleblower from coming forward.
However, there are numerous examples of where loyalty trumped higher ethical values, such as honesty
and integrity, with the result being that financial fraud was not disclosed (e.g. Enron and WorldCom) with
devastating results for shareholders.

The most important consideration in assessing whether a whistleblower acts in an ethical manner is the
intention for ones action. Is it to right a wrong? Is it to give voice to ones values in the face of
countervailing forces? Or, is the basis for the action the pursuit of self-interests, which may manifest itself
in blowing the whistle in order to cash in on the whistle-blower award? After all, greed is a powerful
motivating
force when considering whether to blow the whistle on financial wrongdoing.
An ethical person is one who posses strong character traits built on courage and informed by the belief
that integrity is the backbone of ethical decision-making. A would-be-whistleblower is willing to stand her
ground even in the face of pressure from higher-ups to stay silent. Its not because of the possibility of
receiving a whistleblowers award. Instead, the whistleblower believes in principled behavior and leads
her life in accordance with ethical values.
Blog posted by Steven Mintz, aka Ethics Sage, on September 30, 2014. Dr. Mintz is a professor in the
Orfalea College of Business at Cal Poly San Luis Obispo. Professor Mintz also blogs
at: www.workplaceethicsadvice.com.

09/30/2014 in Accounting and auditing, Accounting ethical standards, Business ethics, Ethical business practices, Ethical
standards in business,Fraud, Societal ethics, Whistle-blowing, Workplace ethics | Permalink | Comments (0)
Technorati Tags: accounting ethics, business ethics, Dodd-Frank, ethical business practices, ethics of whistleblowing, ethics
sage, incentivizing whistleblowers, Steven Mintz, whistleblowing
Reblog (0)Digg ThisSave to del.icio.us
07/01/2014

Scott London Rationalizes Insider Trading prior to going to

Prison
Ethical Blindness Motivates Egregious Behavior
Scott London, a former partner of KPMG, was convicted of insider training last month and sentenced to
five months in prison, a laughable sentence in light of his trading on inside information about KPMG
clients while auditing their books. On June 27, 2014, just prior to going to prison, London participated in a
webcast on accounting ethics. During the interview he provided insight into the motivations for his actions.
The key points are as follows.
London believes he would not have engaged in his illegal insider trading scheme had he
paused to think about the impact getting caught would have on "the innocent the unintended
victims like family and friends." He says that "if I had any idea of the magnitude of impact of
crossing that line between right and wrong, for family and clients, I don't know how I would
have done it."
London says that his participation in the scheme was not the result of things happening so fast
that he got caught up in it, but rather that they developed so slowly. His friend and fellow
defendant in the case, Bryan Shaw,started off asking him for public information, and then
gradually started asking for non-public information.
London believes that "burnout" in his job at KPMG contributed significantly to his poor
judgment. He says he had been asking to get out of that position for three years and "being in
the same position for so long, working extensive hours" took a toll on him to the point that he
didn't value his job as much.
Basically, London is trying to justify his actions by rationalizing them and blaming others including KPMG.
The most interesting statement is that he failed to see the consequences of his actions on others. He did

not see right from wrong. In essence, he suffered from ethical blindness, a term that describes Londons
actions because the events surrounding his decision to engage in insider training crowded out any sense
of right and wrong.
In an interview with Market Watch on insider trading, London said: I believe that its rampant. Information
gets leaked all the time. Its obvious when you look at the trading activity and price fluctuations before and
after press releases. Well, I guess he should know.
In a previous blog I asked the question: What possesses an audit partner to trade on inside information
and violate the accounting professions most sacred ethical standard of audit independence from ones
client? Greed is one motivating force and the failure to identify how his actions might affect others also
influenced his decision.
I cant blame London 100% for violating independence standards. KPMG must share some of the blame
because audit firms must closely monitor partner activities to identify the red flags. KPMG paid the
ultimate price when it resigned as the auditor of Skechers and Herbalife after learning that London
provided non-public information about the companies to a third party, who then used the information in
stock trades. The firm fired London.
In resigning the two audit accounts, KPMG said it was withdrawing its blessing on the financial
statements of Herbalife for the past three years and of Skechers for the past two. KPMG stressed,
however, that it had no reason to believe there were any errors in the companies books. I think the error
in judgment by London counts as an error just as much as if the company purposefully misstated the
financial results of the two companies.
In a statement that should raise red flags for all CPA firms that audit public companies, KPMG stated it
had concluded it was not independent because of alleged insider trading. Independence is the foundation
of the accounting profession and the cornerstone of an audit conducted in accordance with generally
accepted auditing standards. The public (i.e., shareholders and creditors) relies on auditors
independence, objectivity, and integrity to ensure that the audit has been conducted in accordance with
such standards and that the financial statements are free of material misstatements.
The leaking of financial information about a company to anyone prior to its public release affects the level
playing field that should exist with respect to personal and business contacts of the leaker and the
general public. It violates the fairness doctrine in treating equals, equally, and it violates basic integrity
standards. The KPMG scandal concerns me because a pattern of such improprieties may be developing
in the accounting profession.
As for London, he probably will be born again in prison, or at least claim so after being released. Hell
write a book and speak out on ethics whenever he can. Its all part of resurrecting his image. Heck, hell
probably start his own fraud institute and try to ferret out fraud, and try to profit from that endeavor. Wait,
didnt Barry Minkow of ZZZZ Best fame do the very same thing?
Minkow received a 5-year sentence in April 2014 for defrauding a San Diego-area church in what the
judge called a despicable, inexcusable crime. He admitted that he opened unauthorized accounts,
forged signatures on checks and used member donations for personal benefit to steal $3 million from San
Diego Community Bible Church.
Whether its insider trading or stealing funds, London and Minkow lost their moral compass somewhere
along the line and took advantage of their position of trust, the very basis of ethical behavior in business
and accounting.
Blog posted by Steven Mintz, aka Ethics Sage, on July 1, 2014. Dr. Mintz is a professor in the Orfalea
College of Business at Cal Poly, San Luis Obispo. He also blogs at www.workplaceethicsadvice.com.
07/01/2014 in Accounting and auditing, Accounting ethical standards, Accounting ethics dilemmas, Business ethics, Ethical
business practices,Ethical standards in business, Fraud, Social media, Whistle-blowing, Workplace
ethics | Permalink | Comments (2)
Technorati Tags: accounting ethics, audit independence, Barry Minkow, business ethics, ethics sage, insider trading, Scott
London, Steven Mintz

Reblog (0)Digg ThisSave to del.icio.us

04/23/2014

Insider Trading in Accounting Violates Basic Ethical

Standards
Independence and Integrity Compromised by Insider Trading
I am re-posting this blog because my website has been down the past few days so some readers may
have missed it. Thanks you for your continuing interest and support of my work. You may be interested in
my other website:http://www.workplaceethicsadvice.com/.
I have previously blogged about the case of Scott London, an audit partner at KPMG who traded on
inside information and violated the accounting professions most sacred ethical standard of audit
independence. London was convicted of leaking confidential information to his friend, Brian Shaw, about
Deckers, Pacific Capital Bancorp, Skechers, and Herbalife all audit clients of KPMG. The leak of
information about quarterly earnings information led to Shaws unjust enrichment of $1.27 million. Shaw,
a jewelry store owner and country club friend of London, repaid London with $50,000 in cash and a Rolex
watch, according to legal filings.
London settled administrative proceedings with the Securities and Exchange Commission that includes
SEC sanctions and forfeiture of the right to appear or practice before the SEC as an accountant. On the
criminal side, the federal prosecutir in the case has asked for a three-year prison sentence for his insidertrading conviction for selling secret information about the accounting firm's clients to Shaw. London is
scheduled to be sentenced on April 24.
I am happy to report that the California Board of Accountancy completed its investigation of London and
issued an order effective December 27, 2013, that required him to surrender his CPA license and pay
costs of investigation and prosecution in the amount of $1,637.50.
As for KPMG, the firm withdrew its audit opinion on Skechers and Herbalife. The firm released a
statement that should raise red flags for all CPA firms that audit public companies. The firm stated it had
concluded it was not independentbecause of alleged insider trading. This is a weak statement at best and
illustrates the moral blindness of some public accounting firms that do not seem to realize they are at fault
for the actions of auditors with respect to the use of inside information. Londons actions were dishonest,
lacked integrity, and compromised the publics trust in him as a CPA and in KPMG.
This case is a particularly egregious one for the audit profession because it involves insider trading by an
auditor of client stock. The violation cuts to the basic core of what it means to represent the public
interest, not ones own self-interest or the interest of a client. Auditors must not only be independent in
fact, a violation in the Scott London case, but also appear to be independent. How can an auditor expect
the public perception to be he is independent when he gives inside information about a client to a friend
who trades on that information and, whats worse, accepts gifts in return?
Public accounting firms have an ethical obligation to monitor the actions of its partners, managers, and
staff that may impair audit independence. One test of whether independence exists is to assess whether
any threats to independence are present and, if so, whether safeguards exist to mitigate those threats.
The failure in this instance of KPMG is in its lack of quality controls to prevent and detect violations of
basic ethical standards by adequately evaluating these issues.
I am concerned about increasing instances of insider trading by accounting professionals. The leaking of
financial information about a company to anyone prior to its public release affects the level playing field
that should exist with respect to personal and business contacts of the leaker and the general public. It
violates the fairness doctrine in treating equals, equally, and it violates basic integrity standards. The
KPMG scandal concerns me because it may reflect a pattern of such improprieties.
In 2010, Deloitte and Touche was investigated by the SEC for repeated insider trading by Thomas P.
Flanagan, a former management advisory partner and a Vice Chairman at Deloitte. Flanagan traded in

the securities of multiple Deloitte clients on the basis of inside information that he learned through his
duties at the firm. The inside information concerned market moving events such as earnings results,
revisions to earnings guidance, sales figures and cost cutting, and an acquisition. Flanagans illegal
trading resulted in profits of more than $430,000. In the SEC action, Flanagan was sentenced to 21
months in prison after he pleaded guilty to securities fraud. Flanagan also tipped his son, Patrick, to
certain of this material non-public information. Patrick then traded based on that information. His illegal
trading resulted in profits of more than $57,000.
Instances of insider trading by accounting professionals is troublesome because it continues the slide
down the proverbial ethical slippery slope in accounting that began in the 1960s and 1970s when
commercialization in the profession crowded out professionalism. Changes in the rules that now permit
accepting commissions and contingent fees, in non-audit situations, and advertising and soliciting clients
with minimal safeguards started the descent.
I hope the profession learns its lesson from these insider trading cases and, going forward, it does a
better job of monitoring the personal activities of audit, tax and advisory services partners, managers, and
staff that could compromise independence and integrity so that it can live up to its public interest ideal
that makes accounting a profession, not just an occupation.
Blog posted by Steven Mintz, aka Ethics Sage, on April 23, 2014
04/23/2014 in Accounting and auditing, Accounting ethical standards, Accounting ethics dilemmas, Business ethics, Ethical
business practices,Ethical standards in business, Fraud, Workplace ethics | Permalink | Comments (0)
Technorati Tags: accounting ethics, audit independence, business ethics, ethical standards in accounting, ethics
sage, insider trading in accounting, Scott London, Steven Mintz, workplace ethics
Reblog (0)Digg ThisSave to del.icio.us
04/22/2014

Insider Trading in Accounting Violates Basic Ethical

Standards
Independence and Integrity Compromised by Insider Trading
I have previously blogged about the case of Scott London, an audit partner at KPMG who traded on
inside information and violated the accounting professions most sacred ethical standard of audit
independence. London was convicted of leaking confidential information to his friend, Brian Shaw, about
Deckers, Pacific Capital Bancorp, Skechers, and Herbalife all audit clients of KPMG. The leak of
information about quarterly earnings information led to Shaws unjust enrichment of $1.27 million. Shaw,
a jewelry store owner and country club friend of London, repaid London with $50,000 in cash and a Rolex
watch, according to legal filings.
London settled administrative proceedings with the Securities and Exchange Commission that includes
SEC sanctions and forfeiture of the right to appear or practice before the SEC as an accountant. On the
criminal side, the federal prosecutor in the case has asked for a three-year prison sentence for his
insider-trading conviction for selling secret information about the accounting firm's clients to Shaw.
London is scheduled to be sentenced on April 24.
I am happy to report that the California Board of Accountancy completed its investigation of London and
issued an order effective December 27, 2013, that required him to surrender his CPA license and pay
costs of investigation and prosecution in the amount of $1,637.50.
As for KPMG, the firm withdrew its audit opinion on Skechers and Herbalife. The firm released a
statement that should raise red flags for all CPA firms that audit public companies. The firm stated it had
concluded it was not independentbecause of alleged insider trading. This is a weak statement at best and
illustrates the moral blindness of some public accounting firms that do not seem to realize they are at fault
for the actions of auditors with respect to the use of inside information. Londons actions were dishonest,
lacked integrity, and compromised the publics trust in him as a CPA and in KPMG.

This case is a particularly egregious one for the audit profession because it involves insider trading by an
auditor of client stock. The violation cuts to the basic core of what it means to represent the public
interest, not ones own self-interest or the interest of a client. Auditors must not only be independent in
fact, a violation in the Scott London case, but also appear to be independent. How can an auditor expect
the public perception to be he is independent when he gives inside information about a client to a friend
who trades on that information and, whats worse, accepts gifts in return?
Public accounting firms have an ethical obligation to monitor the actions of its partners, managers, and
staff that may impair audit independence. One test of whether independence exists is to assess whether
any threats to independence are present and, if so, whether safeguards exist to mitigate those threats.
The failure in this instance of KPMG is in its lack of quality controls to prevent and detect violations of
basic ethical standards by adequately evaluating these issues.
I am concerned about increasing instances of insider trading by accounting professionals. The leaking of
financial information about a company to anyone prior to its public release affects the level playing field
that should exist with respect to personal and business contacts of the leaker and the general public. It
violates the fairness doctrine in treating equals, equally, and it violates basic integrity standards. The
KPMG scandal concerns me because it may reflect a pattern of such improprieties.
In 2010, Deloitte and Touche was investigated by the SEC for repeated insider trading by Thomas P.
Flanagan, a former management advisory partner and a Vice Chairman at Deloitte. Flanagan traded in
the securities of multiple Deloitte clients on the basis of inside information that he learned through his
duties at the firm. The inside information concerned market moving events such as earnings results,
revisions to earnings guidance, sales figures and cost cutting, and an acquisition. Flanagans illegal
trading resulted in profits of more than $430,000. In the SEC action, Flanagan was sentenced to 21
months in prison after he pleaded guilty to securities fraud. Flanagan also tipped his son, Patrick, to
certain of this material non-public information. Patrick then traded based on that information. His illegal
trading resulted in profits of more than $57,000.
Instances of insider trading by accounting professionals is troublesome because it continues the slide
down the proverbial ethical slippery slope in accounting that began in the 1960s and 1970s when
commercialization in the profession crowded out professionalism. Changes in the rules that now permit
accepting commissions and contingent fees, in non-audit situations, and advertising and soliciting clients
with minimal safeguards started the descent.
I hope the profession learns its lesson from these insider trading cases and, going forward, it does a
better job of monitoring the personal activities of audit, tax and advisory services partners, managers, and
staff that could compromise independence and integrity so that it can live up to its public interest ideal
that makes accounting a profession, not just an occupation.
Blog posted by Steven Mintz, aka Ethics Sage, on April 22, 2014
04/22/2014 in Accounting and auditing, Accounting ethical standards, Accounting ethics dilemmas, Business ethics, Ethical
standards in business,Workplace ethics | Permalink | Comments (0)
Technorati Tags: accounting ethics, audit independence, auditor trading on inside information, ethical standards in
accounting, ethics sage, Scott London, Steven Mintz, Thomas Flanagan, threats and safeguards
Reblog (0)Digg ThisSave to del.icio.us
03/30/2014

Steve Mintz Accounting Ethics Textbook Reviewed

Steven M. Mintz and Roselyn E. Morris, Ethical Obligations and Decision Making in Accounting: Text
and Cases
McGraw-Hill/Irwin, 3rd edition, October 4, 2013, 512 pages, ISBN-10: 007786221X, ISBN-13: 9780077862213
Review by W. Steve Albrecht in the Journal of Business Ethics, March 2014

This book written by Mintz and Morris is a combination textbook and casebook. The authors wrote the
book to guide business and accounting students through the mine- fields of ethical conflicts they will face
throughout their careers and to help insure that their post-graduate profes- sional work meets the highest
standards of integrity, independence, and objectivity. The book represents a nice blend of ethical
reasoning, behavioral ethics, and principles of ethical conduct. The book begins with a theoretical
discussion of ethics, values, character, and reputation. Various religious and philosophical foundations of
ethics are presented. After studying the first chapter, students will have a solid understanding of the
different ethical philos- ophies and approaches to moral reasoning. Each succeed- ing chapter becomes
more practical with Chap. 2 focusing on cognitive processes and ethical decision making in accounting
and business. This chapter discusses the cog- nitive reasoning and ethical decision making models of
Kohlberg and Rest, as well as providing a solid ethical reasoning model that can be used by students as
they face ethical dilemmas. Chapter 3 discusses guiding principles involved in creating an ethical
environment and good corporate governance system within an organization. As one who teaches
corporate governance classes and sits on public company boards of directors, I found this chapter to be
very useful. Chapter 4 introduces the AICPAs Code of Professional Conduct. The chapter does a nice
job dis- cussing various business crises, the professions reactions to those crises, and why the AICPAs
code emerged the way it did. Chapter 5 discusses fraudulent financial statements and auditors
responsibilities. The chapter introduces many of the landmark fraud cases, the evolution of the PCAOB
and other rule-making bodies and exactly what the auditors opinion means when it states that the
financial statements present fairly an entitys financial position, results of operations, and cash flows. As
one who has been an expert witness in many fraud cases and who teaches dedicated fraud classes, I
examined this chapter carefully looking for errors or misjudgments and found none, further evidence that
this book is accurate, well referenced and clearly written. Chapter 6 covers the legal, regulatory, and
professional obligations of auditors. Topics such as confidentiality, whistleblowing, business judgment
(including the concepts of due care, loyalty, and good faith), and the legal liability of auditors are covered
in detail. Chapter 7 covers earnings management and earnings quality. The authors do a nice job
separating acceptable earnings management from unacceptable earnings man- agement. Chapter 8
discusses ethics and corporate gover- nance in international settings and in international financial
reporting. Bribery, illegal acts, foreign company fraud, international corporate governance, and a global
code of ethics are discussed in this chapter.
Throughout the book, the basic ethical concepts of norms, values, ethical relativism, situational ethics,
cultural values, teleology, deontology, justice, and virtue ethics are woven into the discussions of the
professional topics dis- cussed. The books framework is thorough yet easy to understand; theoretical yet
practical. The extremely well written and summarized cases, examples, and academic references that
help students understand the background of the material written and apply the concepts learned are great
strengths of the book. Students who study from this book will have a much stronger ethical basis to help
them cope with the myriad of dilemmas and challenges they will face throughout their careers. And, they
will have a plethora of cases, references and dilemmas to reconsider if they want further study on the
topic. To enrich the learning experience, the authors begin each chapter with an ethical reflection, a
case that sets the tone for the chapter. Throughout the chapters, they have many examples of values and
mission statements, codes of conduct, statistics, exhibits, and other real examples and facts that show
how organizations are trying to apply the concepts being taught in the chapters. These additions make
the book a very nice combination of theory and practice.
One of the books great strengths is its excellent cases. The first seven chapters include 10 cases each,
many of them famous ethical cases where accountants, executives, and corporate directors have been
sued or held liable for their decisions and actions. I have personally been an expert witness in several of
the cases covered in the book and so I studied the authors treatment of these cases in detail. Their writeups were always accurate, presented in an interesting manner and provided great references for further
study by students. The accuracy of the cases led me to follow up on several of the references cited in the
chapters which I also found helpful. My conclusion after reading the book, examining in detail some of the
cases and reading the 20 discussion questions per chapter was that this book would work equally well as
a stand-alone ethics text or as an excellent supplement in auditing, corporate governance, financial
reporting, or other business and accounting classes.

Whenever I review a book, I always ask myself the question of how I would use it. If I were teaching a
stand- alone business or ethics course, with this book I would probably do the following:
1. Never lecture on the chapters because they are extremely well written and easy for students to
understand. I would probably highlight a few of the exhibits, codes, values statements, and
statistics that are in the chapters but would not spend much time in class lecturing on the
material in the book.
2. I would pick one or two cases for each class and assign them to students. I would probably
have students present about half of the cases with me introducing the other half. In covering
the cases in class, I would push students hard to use the concepts in the chapters (the ethical
models, various moral reasoning guidelines, etc.) to support their decisions. I would try hard to
pit the students against each other as they discuss and debate the ethical issues and would
not tip my hand until the class was almost over. I would require every student who responds to
defend not only the decision he or she made but to explain why his or hers is the best
decision.
1. I would do all I could to make the students uncom- fortable with the cases, emphasizing the
real-world nature of the cases and the potential for them to be required to make similar difficult
decisions.
2. At the end of class I would require students to vote to see how they lined up on the issues in the
case before I ever let them know how I felt about the case.
3. I would probably use one of the six major ethics cases for both the midterm and final exam.
These cases are comprehensive in nature and would require the students to not only
apply what they have learned but to also take ethical positions. Often, there may not be a
correct answer; rather, I would grade them on their logic, reliance on moral reasoning, and
ethical and behavioral models, and the completeness of their arguments.
On the other hand, if I were using this book for a supple- mental text in an auditing, financial reporting,
corporate governance, or other class, I would use the resources and principles in the text as well as the
cases to enrich my teaching of ethical subjects and dilemmas. I would use the material presented in the
chapters to teach ethical concepts and the cases to challenge their ethical foundations, ability to adapt
their base-level ethics to different business set- tings, their ethical courage to make tough, ethical
decisions even when personal or organizational loss is involved, and their ethical leadership. In the final
analysis, most students will forget the content they learn in our classes. What they will remember are the
experiences they had and the way they felt in your classroom. If you can teach them to make ethical and
moral decisions, regardless of the cost to them personally or to their organizations, they will be richly
rewarded throughout their careers. This book will go a long way toward helping provide students with the
perspectives and backgrounds they need to have integrity and be objective, fair, and independent. It will
help them develop moral courage to become ethical leaders. I strongly rec- ommend this book as a great
resource for cases and to understand ethical decision making. Every student who goes through a
business school needs exposure to this text or one like it.
"The final publication is available at link.springer.com.
http://link.springer.com/article/10.1007/s10551-014-2127-6
03/30/2014 in Accounting and auditing, Accounting ethical standards, Accounting ethics dilemmas, Business
ethics, Education, Ethical standards in business, Fraud, Press, Social media, Societal ethics, Whistle-blowing, Workplace
ethics | Permalink | Comments (0)
Technorati Tags: accounting ethics, ethical obligations in accounting, ethical standards in accounting, ethics for
CPAs, ethicssage, steve mintz,workplace ethics advice
Reblog (0)Digg ThisSave to del.icio.us
03/13/2014

Chinese Affiliates of Big-Four CPA Firms Barred from

Issuing Audit Reports

Cooperation between the Chinese and U.S. Regulators being put to the Test
On January 22, 2014, the U.S. Securities and Exchange Commission (SEC) Administrative Law Judge
Cameron Elliot levied sanctions pursuant to SEC Rule of Practice 102(e) against the Chinese affiliates of
the Big Four accounting firms for violating Section 106(e) of the Sarbanes-Oxley Act of 2002 by
withholding audit documents the SEC requested in the course of enforcement investigations. Judge Elliot
censured and suspended the Firms from serving as auditors to companies whose securities are traded in
the U.S. for a period of six months.
In case you are not familiar with the facts, the SEC filed an administrative action against the auditors in
2012 after struggling for years to obtain information for dozens of accounting fraud probes at China-based
companies. Once a petition for review is filed by the four auditors that received the bar -- Deloitte Touche
Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong
Tian CPAs Ltd. -- the judges ruling is held from going into force until the SEC makes a decision.
The bar, if enforced, would force more than 200 Chinese companies traded in the U.S. to find new
auditors, while multinationals with significant operations in China would also have to bring in new firms to
check those units. If the SEC upholds the judges decision, the firms could ask the U.S. Court of Appeals
in Washington to overturn the bar.
The Firms contend that Chinese law prohibits them from producing audit work papers and other
related documents to the SEC or other foreign regulators. Notwithstanding any such prohibition, Judge
Elliot determined that willful refusal to comply under Section 106 means choosing not to act after
receiving notice that action was requested and that under such a definition, the motive for the choice is
irrelevant. Because each of the Firms had not complied with at least one properly served Section 106
request, Judge Elliot determined that each had violated Section 106.
Judge Elliot also considered and rejected four arguments advanced by the Firms as affirmative defenses:
(1) international comity prevents enforcement of the Section 106 requests; (2) the Firms did not act
willfully under Section 106 because their legal obligations were objectively unclear; (3) the SEC lacks
authority to request documents created prior the enactment of Dodd-Frank; and (4) the proceeding before
Judge Elliot violated due process and equal protection and constituted selective prosecution.
Judge Elliot did not consider the first two arguments to be affirmative defenses. Ruling that judicial
enforcement of the Section 106 requests was not a prerequisite to the administrative proceeding, Judge
Elliot dispensed with the first argument on the ground that it was therefore irrelevant whether the Section
106 requests were enforceable. Based on his construction of Section 106, Judge Elliot next found
nothing objectively unclear about Section 106 or the SECs requests. Referencing his construction of the
meaning of willfully under Section 106, he stated that the Firms knew exactly what was expected of
them.
Judge Elliot considered the third and fourth arguments as affirmative defenses but rejected both. Being
aware of no authority barring the use of a Sarbanes-Oxley 106 request to obtain documents created prior
to Dodd-Franks effective date, he found no merit to the third argument. Judge Elliot questioned his
authority to consider the due process or equal protection claims but found that due process is satisfied
where a party understands the issues and is afforded a full opportunity to meet the charges during the
course of the proceeding. Finding no evidence of violations of due process or equal protection or of
selective prosecution claims, Judge Elliot rejected the Firms fourth argument as well.
The judges decision has sent shockwaves through the auditing community. Chinese affiliates of the four
largest accounting firms plan to file an appeal to U.S. regulators to reverse the judges decision to bar
them for six months after they blocked investigations of possible accounting fraud.
The SEC will have to weigh the punishment just as U.S. and Chinese regulators make strides in
overcoming some of the legal conflicts that the auditors say prevented them from cooperating with probes
of China-based companies listed on U.S. exchanges.
The SEC has been continuously frustrated by the Firms reluctance to turn over audit documents so that
the Commission can determine whether fraud has been committed by Chinese companies. The Public

Company Accounting Oversight Board (PCAOB) has been similarly frustrated by efforts of the firms to
keep confidential work-papers the PCAOB needs to carry its obligations under the quality review process
established by Sarbanes-Oxley.
The overlooked point in the debate whether the Firms should turn over requested documents is the
cultural differences between the U.S. and China. In the U.S., we hold individuals and organizations
accountable for misconduct including fraud. The Chinese have a more group-oriented mentality on these
issues. They are secretive and take offense to allegations of misconduct by anyone in the group as it
reflects badly on the group as a whole. The Chinese believe trust is the issue at stake here and U.S.
regulators should trust that Chinese authorities, such as the Chinese Securities Regulatory Commission,
will handle the matter internally.
The China-based auditors have argued they are caught between U.S. law, which requires them to turn
over all documents requested by regulators, and Chinese law, which prohibits transferring data that might
contain state secrets to foreign parties. A compromise could be struck by giving the PCAOB access to
work papers or allowing it to meet with auditors outside China, according to Chairman James Doty.
An agreement in May between the two countries allowed some cooperation, and U.S. regulators have
received documents on at least four companies, the China Securities Regulatory Commission said last
month. That agreement didnt allow for the PCAOB to inspect audit firms in China.
This is an important issue for the future relationship between Chinese companies and U.S. regulators.
The fact is U.S. authorities do have access to affiliates of U.S. companies in other countries. There is no
valid reason for the regulators to make an exception in the case of Chinese companies simply because
they may operate according to a different set of values. Ethics is best on norms of behavior and
cooperation is one such norm as it pertains to business. The SEC should stand firm on this matter as it
will signal to other countries whether we are serious in applying the law equally.
Blog posted by Steven Mintz, aka Ethics Sage, on March 13, 2014
03/13/2014 in Accounting and auditing, Accounting ethical standards, Accounting ethics dilemmas, Business ethics, Ethical
business practices,Ethical standards in business, Fraud | Permalink | Comments (0)
Technorati Tags: accounting ethics, auditing ethics, China Securities Regulatory Commission, Chinese affiliates of US
companies, ethics sage,quality review of auditors, Steven Mintz, workplace ethics
Reblog (0)Digg ThisSave to del.icio.us
03/06/2014

Should the Government Further Restrict Non-audit

Services Provided to Audit Clients?
Audit Independence: A Myth or Reality?
The Public Company Accounting Oversight Board (PCAOB) that oversees public company audits in the
U.S. is concerned that auditors are not independent of their clients. Since independence is the bedrock of
the profession, any crack in that foundation threatens the value of the audit and there may be
consequences for investors and creditors who rely on accurate and reliable financial statements.
The concern about audit independence is an old one whether the performance of non-audit services for
an audit client impairs audit independence. For years the profession has claimed that it does not. The
firms claim they would not compromise their independence by being soft on the client when an audit issue
arises because the firm doesnt want to risk losing lucrative non-audit services by going against the client
on an audit issue.
Since the collapse of Enron and its auditor, Arthur Andersen, more than a decade ago, regulators have
been cautious about auditors receiving big fees for consulting and other services that could potentially
cloud their judgment when auditing a company's financial statements. The Sarbanes-Oxley Act prohibits
certain non-audit services for audit clients including financial information systems design and installation,
the most lucrative of all such services. This restriction makes sense to me because audit independence

may be compromised if the auditors identify weaknesses and flaws in the system that helped to create.
The fact that the firm may, in fact, remain independent is not the point. Independence is required both in
appearance and fact so by auditing a client for whom the firm helped to install an information system, it
may appear in the mind of a reasonable observer that the auditor may not be independent. The
appearance of a possible lack of independence is a sufficient conflict to negate independence.
The PCAOB says it has started quizzing accounting firms on whether their fast-growing consulting
practices could hurt the quality of their audits. Overseas, the European Parliament is expected to vote in
April on legislation that would cap non-audit services provided by a company's auditor at 70% of the audit
fee. At least 300 companies in the U.S. and Europe paid their auditors as much for add-on services as
they did for audit work, according to public filings from the past two years reviewed separately by data
provider Audit Analytics and stock-research firm Exane BNP Paribas.
The capping of non-audit fees, I believe, will not accomplish its goal. Moreover, it is an attempt by the
government to interfere in the marketplace for professional services. Non-audit fee controls are fraught
with danger for the public interest. The possibility exists that the firms will cut down on staff providing the
non-audit services for audit clients by sending in less experienced audit staff and/or a smaller number of
staff thereby compromising audit quality. Also, auditors may simply recover from the non-audit fee
controls by charging clients for which audits are not performed higher fees when non-audit services (i.e.,
information systems design and installation) are performed for that client.
One example of the imbalance between fees received for audit and non-audit services is that HSBC
Holdings PLC paid its auditor, KPMG LLP, $208 million for "other services" between 2010 and 2012.
That's more than five times as much as the U.K. bank paid the firm for auditing its books. The added work
included "ad hoc accounting advice," consulting on information-technology security, and subsidiary audits,
according to a regulatory filing. The filing added that HSBC only uses KPMG for extra services when it
can benefit from the firm's historical knowledge of the bank and when its independence won't be
compromised. That seems appropriate to me.
The accounting profession has ethical standards to control for a possible loss of independence when
performing non-audit services for an audit client including the auditor should assess whether the client
has assumed responsibilities for the services, adequately oversees the performance of such services,
evaluates the adequacy and results of the services performed, and the client must accept responsibility
for the results of the services.
I do not want to dismiss the concerns of regulators about possible impairments of independence. In fact,
in January 2014, KPMG LLP agreed Friday to pay $8.2 million to settle SEC allegations that the Big Four
accounting firm violated rules intended to keep outside auditors from getting too close to their clients.
KPMG provided non-audit services such as bookkeeping and payroll to affiliates of two of its audit clients
and the firm also hired a recently retired senior-level tax counsel of a third audit client's affiliate only to
loan him back to the affiliate to do the same work. Those moves by KPMG between 2007 and 2011, the
SEC said, violated "auditor independence" rules that require auditors to avoid conflicts of interest that
could compromise their ability to audit a company's financial statements impartially and rigorously.
So whats the answer to the continuing battle between the accounting profession and SEC about audit
independence issues when firms get to close with their audit clients? In the European Union, one
approach that has been put forth is to require audit firms to spin off their non-audit divisions and operate
solely as audit practitioners. Proponents argue that audit firms cant be independent as long as they
provide (lucrative) non-audit services since there is a conflict of interest. Opponents argue that many
talented individuals will leave the profession. This proposal may lead to larger fees for such services and,
it seems to me, is unfair to the client that has an ethical right to choose its preferred provider of non-audit
services.
Another proposal is for the government to transfer responsibility for financial audits of public companies to
a governmental agency. Under this proposal, companies would contribute to a fund used to compensate
the government auditor. A companys contribution to the fund would be determined by the expected
complexity of the companys audit. The government agency would be responsible for auditing only
publicly traded companies. My problem with this proposal is history has proven that governmental

agencies do not perform as well as private businesses and such a system is likely to be bureaucratic,
slow-moving, and inefficient.
The answer always comes down to the ethics of individuals and the firms that provide non-audit services
for audit clients. The accounting profession has established ethical standards to counteract any threats to
independence and recommends measures that build in safeguards to prevent threats from compromising
independence. In fact, the American Institute of CPAs has recently revised its code of conduct to reflect
the threats and safeguards approach. Just because there may be an occasional lapse in independence,
such as in the KPMG case, we should not throw out the baby with the bath water. If the rules need to be
tightened, then the profession should do so through its deliberative process that has served the business
community well for decades.
Blog posted by Steven Mintz, aka Ethics Sage, on March 6, 2014
03/06/2014 in Accounting and auditing, Accounting ethical standards, Accounting ethics dilemmas, Business ethics, Ethical
business practices,Workplace conflict, Workplace ethics | Permalink | Comments (0)
Technorati Tags: accounting ethics, audit conflicts of interest, audit independence, ethics sage, non-audit services, Steven
Mintz, threats and safeguards, workplace ethics
Reblog (0)Digg ThisSave to del.icio.us
11/13/2013

Accounting for the Public Interest: Perspective of the

Ethics Sage
New Publication Outlines the Evolution of Social Accounting
In an increasingly globalized business environment, enterprises are now under ever-greater pressure to
meet continuously rising objectives. However, as the corporate community expands, so do its social
responsibilities. Therefore a commitment to ethical accounting practices is the bedrock of a sociallyconscious organization and failing to serve the public interest through ethical accounting can have lasting
negative consequences for organizations. One new publication on this subject of social accounting is
Accounting for the Public Interest, published by Springer and edited by renowned ethics professor Dr.
Steven Mintz.
Accounting for the Public Interest is considered by many experts to be one of the first publications to truly
delve into the roles and responsibilities that accounting systems and the professionals that work within
the industry have within the society around them. Its a book that covers many of the unique facets of
accounting procedures, and how those procedures can be improved upon in order to continually meet
evolving obligations as the global business environment expands.
Written by long-time contributors to Research in Accounting Ethics, a symposium sponsored by the public
interest section of the AAA (American Accounting Association), the book is a standard-bearer within the
social accounting education field. One of the unique elements of Accounting for the Public Interest, as a
publication, is that it provides several unique perspectives on the subject matter. Its a book that covers
the subject of accounting from social, philosophical, economic and international viewpoints in order to
provide the reader with a rounded understanding of the complexities that accountants and other company
stakeholders must consider.
The comprehensiveness of the publications insight into modern financial reporting requirements provides
all readers a full understanding into a companys obligations from a regulatory standpoint. Its an area
which has been in great focus in many social communities as growing financial and online firms continue
to report strong earnings while limiting their tax exposure. The book then covers potential instances of
fraud and how those instances have been dealt with by society while maintaining an environment that is
supportive of future business development. Accounting for the Public Interest also highlights the role of
whistleblowers within todays accounting landscape, and how those whistleblowers help to fight against
corporate policies that do not serve the greater community.

Students of the accounting field will especially be interested in the books contextualized look at the
history of how accounting was used to meet its public obligation in past eras. This serves as a foundation
to driving forward into the modern area, in which growing firms are tasked with planning for their
expansion into communities where their presence will become an economic driving force. Indeed, for
those entering into the accounting field, this book will act as an interesting education on the concepts
required for successful accounting in the current day industry.
Those interested in purchasing a copy of this highly praised publication can visit the following link to learn
more - http://www.springer.com/social+sciences/applied+ethics/book/978-94-007-7081-2.
Press Release posted on November 13, 2013

11/13/2013 in Accounting and auditing, Business ethics, Education, Ethical business

practices, Press | Permalink | Comments (0)
Technorati Tags: accounting ethics research, accounting for the public interest, Accounting for the Public Interest, Advances
in Business Ethics Research Vol. 4, ethical standards in accounting, ethics sage, Perspectives on Accountability
Professionalism and Role in Society, social accounting, Steven Mintz
Reblog (0)Digg ThisSave to del.icio.us
08/15/2013

JobsOhio Program Violates Ethics Standards

Conflicts of Interest Raise Questions about Governor Kasichs JobsOhio Program
The JobsOhio program is under investigation once again. I have previously blogged about independence
questions raised with respect to the audit of the program by KPMG.
As the states lead economic-development agency, Jobs-Ohio is charged with recommending financial
incentives for companies seeking to locate in the state.
Last fall, charges were leveled at KPMG for its lack of independence in the JobsOhio audit. As KPMG
was auditing JobsOhios books last fall, the global auditing and consulting firm also was seeking $1
million in taxpayer money from JobsOhio for an unnamed client.
JobsOhio, the states privatized development agency, says that the grant request was handled separately
from and without the knowledge of the firms auditing division. But the timing raises ethical questions.
The situation also exposes weaknesses in the laws creating Governor John Kasichs JobsOhio, because
recipients of state aid are kept secret until the project is approved.
Laura Jones, a spokeswoman for JobsOhio, said KPMG LLPs Columbus office conducted the audit, but
the grant was sought by an out-of-state office.
The fact that KPMG serves JobsOhio and countless other businesses ... from the same office here in
Columbus is not a conflict in our minds, she said, adding that the state also monitors and ultimately
approves taxpayer-funded incentives to companies.
KPMG was chosen by JobsOhio to conduct an audit required by law. On November5, 2012, about the
time the audit was being conducted, KPMG also was listed on a sheet of eight pending grant
commitments from the state for fiscal year 2013, according to a document obtained by the Columbus
Dispatch through a public-records request.
JobsOhio officials said the record is confidential and the state released it by mistake.
Officials from the Kasich administration, JobsOhio, and KPMG indicated that the grant was not for KPMG
itself, but for an anonymous KPMG business client. A KPMG spokesman said only that were confident
we acted properly at all times. It would be inappropriate for us to comment further due to client
confidentiality.

All the excuses and explanations do not mask the fact that KPMG lacked independence in appearance if
not in fact raising ethical questions about the JobsOhio program. KPMGs behavior in this matter fails to
meet the independence and objectivity smell test.
Now, another matter has arisen bringing into question whether the JobsOhio program should be shut
down. On August 5th of this year, two Cincinnati lawmakers called for an ethics investigation into possible
conflicts of interest among board members of JobsOhio.
The lawmakers said Governor Kasichs job-creation organization may be cutting secret deals that benefit
big business and donors who support him and other Republicans.
Their complaints are based on a Dayton Daily News report last month that found six of nine members of
the JobsOhio board of directors have financial ties to companies that got tax credits through the agency
and the state.
This looks terrible, said state Representative Connie Pillich, D-Montgomery, who joined state
Representative. Denise Driehaus, D-Clifton Heights, in calling for an investigation into JobsOhio by the
state ethics commission.
Its a symptom of a larger problem, Pillich said. It reeks of secrecy, self-dealing and everything bad
government can be.
Kasich said Thursday the call for an ethics investigation is a bunch of political carping. JobsOhio doesnt
need to be more open about its work, the governor said. Theres tremendous transparency, Kasich said.
This is all politics.
A spokeswoman for Kasich, Connie Wehrkamp, said board members do not have conflicts of interest and
that most of the deals cited by Democrats were in place before JobsOhio began work. She also said
board members do not vote on or personally approve tax breaks to companies.
This is a weak explanation for the ethics of the program. If deals were in place before JobsOhio began its
operations, then those relationships should have been considered in creating the JobsOhio program and
the lawmakers should have recused themselves from decision-making in any matter related to JobsOhio,
not just tax breaks to the entity. Ethics should evolve to meet the demands of new situations and
challenges that raise conflict of interest concerns. The JobsOhio program created ethical challenges that
were ignored by Ohio lawmakers including Governor Kasich.
I agree with the criticism of the JobsOhio program and Governor Kasichs weak explanation for not
adhering to conflict of interests standards. Certainly he has chosen not to take the ethical high road in this
matter. Government programs must not only be free of conflicts and be independent programs, they must
appear to be that way in the publics mind. The JobsOhio program has come under ethics scrutiny twice
in less than a year and Governor Kasich should shut it down to avoid further embarrassment and charges
that bring into question the ethics of his administration.
Blog posted by Steven Mintz, aka Ethics Sage, on August 15, 2013
08/15/2013 in Accounting and auditing, Business ethics, Government ethics | Permalink | Comments (0)
Technorati Tags: conflicts in government, ethics sage, government ethics, Governor Kasich, JobsOhio, Steven
Mintz, taxpayer-funded government programs, workplace ethics
Reblog (0)Digg ThisSave to del.icio.us
08/09/2013

Fraud at Bank of America

Subprime Mortgage Fraud Allegations Hit Bank of America
The disgraceful actions of so many banks and financial institutions in the subprime mortgage mess that
ushered in the financial crisis of 2007-2008 finally hit Bank of America. On August 6, 2013, the
Department of Justice and Securities and Exchange Commission sued BofA for alleged securities fraud.

The DOJ and SEC accused the bank of defrauding investors when it sold $850 million mortgaged-backed
securities in 2008 without informing them of the risks of default.
The sale of subprime mortgages that were grouped as securitized investments (i.e., secured by the
home) and that triggered the financial meltdown was brought on by excessive risk taking. Some have
blamed moral hazard as a major contributing factor. Moral hazard occurs where one party is responsible
for the interests of another, but has an incentive to put her own interests first. Research by Atif Mian and
Amir Sufi of the University of Chicagos business school provides hard evidence that securitization of
mortgages fostered moral hazard among mortgage originators, which led them to issue loans to
uncreditworthy borrowers. They were motivated to do so by moral hazard effects, in that the securitized
assets were sold off to unsuspecting investors and so the risk of default transferred to these parties, not
the originating banks.
Bank of America said it is fighting the lawsuit arguing that the investors who bought the securities were
sophisticated and even performed better than similar loans from other banks. We are not responsible for
the housing market collapse that caused mortgage loans to default at unprecedented rates, and these
securities to lose value as a result, BofA spokesman Lawrence Grayson said, according to a report by
CNN.
Bank of America ought to step up and do the right thing. It has already been implicated in bank fraud
through entities like Countrywide that it purchased. In what is the largest settlement so far of a mortgagebacked securities class action lawsuit, the parties agreed, on April 17, 2013, to settle the litigation for
$500 million. For BofA, its actions in the subprime mess are only the tip of the iceberg.
The 2012 National Mortgage Settlement between five banks, including BofA, provides extensive relief to
borrowers in the form of loan modifications, refinancing, and even cash payouts as a result of robosigning. That practice led to the banks signing foreclosure documents without always verifying the
accuracy of the forms and existence of supporting documents. The settlement required the banks to pay
a total of $25 billion to federal and state governments as well as to borrowers.
BofA, in a statement to the media following the settlement, said it has reviewed its policies and corrected
any improper procedures: "The agreement references activities from over a year ago that have been
addressed as we do all we can to modify loans when possible and to ensure foreclosures are fair when
they are unavoidable."
Its not just Bank of America that has come under scrutiny. The same day BofA was sued, the Swiss bank
UBS said it is paying an additional $50 million to settle SEC charges that it misled investors into buying
mortgage bonds sold in 2007. UBS, which did not admit nor deny wrongdoing, said the settlement marks
the end of the SECs probes of its collateralized debt obligations backed by home mortgage securities.
The list of settlements goes on including Citigroup ($285 million on October19, 2011); JP Morgan
Securities ($153.6 million on June 21, 2011; and Goldman Sachs ($550 million on July 15, 2010).
Bank of America is the poster child for fraudulent subprime mortgages. It (allegedly) committed almost $1
billion of mortgage fraud on its own and another $500 million through its now acquired bank, Countrywide.
The bank has never cooperated with the government on any of the charges choosing, instead, to fight
those with the result that the government will have to spend millions our hard earned tax dollars to defend
the indefensible.
In my view, Bank of America acts with impunity and consistently fails to consider the public interest in its
banking actions. The company culture is one of deceit, cover-up, and failure to accept responsibility for its
actions. BofA needs to come clean and admit wrongdoing in the current subprime mortgage case. It does
not do anyone any good to drag out the governments investigation. The bank knows or should know it
will be forced to admit its failings sooner or later and settle with the government. Why not retain some
modicum of dignity and respect by doing the honorable thing now?