Organizational dissidence in audit firms is created when

Ethical Obligations and Decision Making in Accounting Text and Cases Third Edition

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Ethical Obligations and Decision Making in Accounting Text and Cases Third Edition

Steven M. Mintz, DBA, CPA Professor of Accounting California Polytechnic State University, San Luis Obispo

Roselyn E. Morris, Ph.D., CPA Professor of Accounting Texas State University–San Marcos

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ETHICAL OBLIGATIONS AND DECISION MAKING IN ACCOUNTING: TEXT AND CASES, THIRD EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2014 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2011 and 2008. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978–0–07–786221–3 MHID 0–07–786221–X

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Library of Congress Cataloging-in-Publication Data Mintz, Steven M. Ethical obligations and decision making in accounting: text and cases / Steven M. Mintz, DBA, CPA, Professor of Accounting California Polytechnic State University, San Luis Obispo Roselyn E. Morris, PhD, CPA, Professor of Accounting Texas State University-San Marcos. — Third edition. pages cm ISBN 978-0-07-786221-3—ISBN 0-07-786221-X 1. Accountants—Professional ethics—United States— Case studies. I. Morris, Roselyn E. II. Title. HF5616.U5M535 2014 174'.4—dc23

2013011582

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

www.mhhe.com

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“Whatever we learn to do, we learn by doing it.” — Aristotle

We hope this book inspires students to engage in the learning process, to make ethical choices in their lives, and always strive for excellence in whatever they do.

Dedication

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About the Authors STEVEN M. MINTZ, DBA, CPA, is a professor of accounting in the Orfalea College of Business at the California Polytechnic State University–San Luis Obsipo. Dr. Mintz received his DBA from George Washington University. His first book, titled Cases in Accounting Ethics and Professionalism, was also published by McGraw-Hill. Dr. Mintz develops individual courses in professional accounting ethics for Bisk Education that meet each state’s board of accountancy mandatory requirements for continuing education in ethics. He also writes two popular ethics blogs under the names “ethicssage” and “work- placeethicsadvice.” Dr. Mintz has received the Faculty Excellence Award of the California Society of CPAs and Service Award from the California Board of Accountancy for his work on the Advisory Committee on Accounting Ethics Curriculum.

ROSELYN E. MORRIS, PH.D., CPA, is a professor of accounting in the Accounting Department at the McCoy College of Business, Texas State University–San Marcos. Dr. Morris received her Ph.D. in business administration from the University of Houston. She is a past president of the Accounting Education Foundation and a member of the Qualifications Committee of the Texas Board of Public Accountancy. Dr. Morris has received the Outstanding Educator Award from the Texas Society of CPAs.

Both Professors Mintz and Morris have developed and teach an accounting ethics course at their respective universities.

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Preface Why Did We Write This Book?

The first edition of Ethical Obligations and Decision Making in Accounting: Text and Cases was written in the wake of the dot.com bubble and accounting scandals at companies such as Enron and WorldCom. The second edition was written in the wake of the financial meltdown of 2007–2008 that was due to high-risk lending and borrowing practices. The result of these scandals has been an increased call by professional and regulatory bodies for ethics education of accounting students in values, ethics, and attitudes to support pro- fessional and ethical judgments and act in the public interest. We dedicate ourselves to this goal through our book.

Several states now require their accounting students to complete an ethics course prior to certification. Texas was first state to do so, and it requires accounting students in Texas and those moving into the state to complete an ethics course at a Texas uni- versity or in their home institution. California and Colorado require separate account- ing ethics courses; states such as Maryland, New York, and West Virginia also have separate ethics course requirements. This book is written to enable instructors to address the content material that state boards typically expect to be covered in qualify- ing courses.

Ethical Obligations and Decision Making in Accounting was written to guide students through the minefields of ethical conflict in meeting their responsibilities under the pro- fessions’ codes of conduct. Our book is devoted to helping students cultivate the ethical commitment needed to ensure that their work meets the highest standards of integrity, independence, and objectivity. We hope that this book and classroom instruction will work together to provide the tools to help you make ethical judgments and carry through with ethical actions.

Our book blends ethical reasoning, components of behavioral ethics, reflection, and the principles of ethical conduct that embody the values of the accounting profession. We incorporate these elements into a framework to consider the ethical obligations of accountants and auditors and how to make ethical decisions that address the following material:

• The role of moral and cognitive development in ethical reasoning, ethical judgment, and ethical orientation

• Professional codes of conduct in accounting • Ethical corporate governance systems • Fraud detection and prevention • Legal and regulatory obligations of auditors • Whistleblowing obligations of accountants and auditors • Earnings management issues and the quality of financial reporting • Ethical systems, global ethics standards, and corporate governance considerations in

doing business worldwide

Attributes of This Textbook Ethical Obligations and Decision Making in Accounting is designed to provide the instructor with comprehensive coverage of ethical and professional issues encountered by accounting professionals. Our material provides the best flexibility and pedagogical

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effectiveness of any book on the market. To that end, it includes numerous features designed to make both learning and teaching easier, such as:

• Ethical reflections that set the tone for each chapter • 160 discussion questions • 76 cases (10 per Chapters 1–7 and 6 in Chapter 8), about one-third of which are from the

SEC enforcement files • 6 additional major cases that can be used for comprehensive testing, a group project, a

research assignment, or a capstone to the book • Dozens of additional cases and instructional resources, which are available to enrich

student learning • Links to videos for instructors

Pedagogical approach:

• The book is comprehensive enough to serve as a stand-alone text, yet flexible enough to act as a co-text or supplementary text across the accounting curricula or within an auditing or financial accounting course.

• There is sufficient case and supplementary material to allow the instructor to vary the course over at least two to three terms.

• The writing style is pitched specifically to students, making the material easy to follow and absorb.

• Group discussions and role-play opportunities using case studies • Video links to bring case material to life

The Instructor Edition of the Online Learning Center, www.mhhe.com/mintz3e, offers materials to support the efforts of first-time and seasoned instructors of accounting ethics. A comprehensive Instructor’s Manual provides teaching notes, grading sugges- tions and rubrics, sample syllabi, extra cases and projects, and guidelines for incorporating writing into the accounting ethics course; a Test Bank that provides a variety of multiple- choice, short answer, and essay questions for building quizzes and tests; additional cases that can be assigned, including some that were not carried over from the first and second editions; links to videos to enhance the learning experience and bring case discussions to life; and PowerPoint presentations for every chapter make a convenient and powerful lecture tool.

Changes in This Edition The behavioral approach to ethics leads to understanding and explaining moral behavior in a systematic way. We have expanded our discussion of ethics beyond the traditional philosophical moral reasoning methods that teach students how they should behave when facing ethical dilemmas and now also engage them to understand their own behavior better and compare it to how they would ideally like to behave. We incorporate those discussions in addressing ethical obligations of accountants and auditors under professional codes of conduct and in areas such as whistleblowing considerations under Sarbanes-Oxley (SOX) and the Dodd-Frank Financial Reform Act.