Ethics and Professional Responsibility

Chapter 2

TRUE/FALSE QUESTIONS

1. Ethics focuses on the way in which moral principles apply in daily life.

ANSWER: T PAGE: 35 TYPE: N Objective: AACSB Ethics Skill Level: AICPA Critical Thinking

2. Ethics is not concerned with the way in which moral principles are derived.

ANSWER: F PAGE: 35 TYPE: N Objective: AACSB Ethics Skill Level: AICPA Critical Thinking

3. A background in business ethics is not as important as knowledge of specific laws.

ANSWER: F PAGE: 35 TYPE: = Objective: AACSB Ethics Skill Level: AICPA Critical Thinking

4. Lying can be a violation of a duty of loyalty that an employer may owe to its employees.

ANSWER: T PAGE: 35 TYPE: = Objective: AACSB Ethics Skill Level: AICPA Critical Thinking

5. Discharging only one employee for ethical reasons has no impact on others’ unethical behavior in the workplace.

ANSWER: F PAGE: 37 TYPE: N Objective: AACSB Ethics Skill Level: AICPA Risk Analysis

17 18 UNIT ONE: THE FOUNDATIONS

6. To foster ethical behavior among employees, managers should apply ethical standards to which they are committed.

7. Ethical codes of conduct, more than management’s behavior, set the ethical tone of a firm.

8. Setting realistic workplace goals has no impact on employees’ unethical behavior.

ANSWER: F PAGE: 39 TYPE: N Objective: AACSB Ethics Skill Level: AICPA Risk Analysis

9. Corporate ethical policies and programs must be coordinated and monitored to be effective.

10. A choice benefiting one of several groups to whom a firm owes ethical duties may adversely affect another group.

ANSWER: T PAGE: 42 TYPE: + Objective: AACSB Ethics Skill Level: AICPA Risk Analysis

11. In the interest of preserving personal freedom, the law codifies all ethical requirements.

ANSWER: F PAGE: 42 TYPE: + Objective: AACSB Analytic Skill Level: AICPA Legal

12. Corporations owe ethical duties to their shareholders and their employees.

ANSWER: T PAGE: 42 TYPE: + Objective: AACSB Ethics Skill Level: AICPA Critical Thinking FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER 13. Simply obeying the law does not fulfill all ethical obligations.

ANSWER: T PAGE: 42 TYPE: + Objective: AACSB Ethics Skill Level: AICPA Risk Analysis

14. Corporations owe legal duties to their shareholders and their employees.

ANSWER: T PAGE: 42 TYPE: N Objective: AACSB Analytic Skill Level: AICPA Legal

15. An ethical issue involving conflicting duties can only be resolved by establishing which duties take priority over others.

16. An action may be legal but not ethical.

17. The legality of an action is always clear.

ANSWER: F PAGE: 44 TYPE: = Objective: AACSB Analytic Skill Level: AICPA Legal

18. Ignorance of the law will always excuse a business from liability for a violation of that law.

ANSWER: F PAGE: 44 TYPE: = Objective: AACSB Analytic Skill Level: AICPA Legal

19. Acting in good faith gives a business firm a better chance of defending its actions in court.

20. Technological developments can lead to ethical and legal uncertainties.

ANSWER: T PAGE: 44 TYPE: N 20 UNIT ONE: THE FOUNDATIONS

Objective: AACSB Reflective Skill Level: AICPA Critical Thinking FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER 21. Under the ethical principle of rights theory, one person’s set of values is as “right” as another’s.

22. In ethical terms, a cost-benefit analysis is an assessment of the negative and positive effects of alternative actions on individuals.

23. According to utilitarianism, it does not matter how many people benefit from an act.

24. An accountant’s legal and ethical standard of care is based on generally accepted accounting principles and generally accepted auditing standards.

ANSWER: T PAGE: 48 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

25. An accountant’s violation of generally accepted accounting principles and generally accepted auditing standards is prima facie evidence of negligence.

26. Compliance with generally accepted accounting principles and generally accepted auditing standards always relieves an accountant of liability for negligence.

ANSWER: F PAGE: 49 TYPE: N Objective: AACSB Analytic Skill Level: AICPA Legal

27. An attorney who does not discover a law that could be found through a reasonable amount of research is not liable, for negligence, to a client to whom that law applies.

ANSWER: F PAGE: 49 TYPE: N 22 UNIT ONE: THE FOUNDATIONS

Objective: AACSB Analytic Skill Level: AICPA Legal FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER 28. An attorney who misses a crucial deadline, such as the expiration of a statute of limitations, may be liable to a client for that reason.

29. An accountant may be liable if a purchaser of a security suffers a loss due to reliance on an accountant’s misstatement or omission of a material fact in a financial statement.

30. An accountant’s failure to follow generally accepted accounting principles and generally accepted auditing standards may show a lack of due diligence.

31. An accountant may be liable if he or she makes a false or misleading statement in docu- ments filed with the Securities and Exchange Commission that affects the price of a security.

32. Accountants are not subject to criminal penalties for violations of federal securities laws.

33. Accountants are not subject to criminal penalties for violations of the Internal Revenue Code.

34. Bribery of foreign government officials is both an ethical and a legal issue.

ANSWER: T PAGE: 58 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Critical Thinking 24 UNIT ONE: THE FOUNDATIONS

35. Some U.S. bribery laws are directed toward accountants.

MULTIPLE-CHOICE QUESTIONS

1. Global Corporation, like other businesses, has duties prescribed by

a. ethics and the law. b. ethics only. c. neither ethics nor the law. d. the law only.

ANSWER: A PAGE: 35 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

2. Mack is sales manager for National Products, Inc. Compared to Mack’s personal activities, his business activities involve

a. more complex ethical standards. b. simpler ethical standards. c. the same ethical standards. d. no ethical standards.

ANSWER: C PAGE: 35 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

3. In studying business law, Professor Smith’s students also study ethics in a business context. Ethics is the study of what constitutes

a. financially rewarding behavior. b. legal behavior. c. religious behavior. d. right or wrong behavior.

ANSWER: D PAGE: 35 TYPE: = Objective: AACSB Ethics Skill Level: AICPA Critical Thinking FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER 4. Tim works for Universal Sales Company. His job includes putting “spin” on the company’s successes and failures. In this context, ethics consist of

a. questions of rightness and wrongness. b. the firm’s quarterly revenue. c. whatever is legal. d. none of the above.

Fact Pattern 2-1 (Questions 5–6 apply) Quantity Trucking Company (QTC) owns a fleet of trucks that transports hazardous waste across the United States. Rod is a QTC driver, whom QTC knows drives longer hours than federal regulations permit. One night, Rod exceeds the limit and has an accident. Spilled chemicals contaminate Small City’s water source, forcing the residents to move away.

5. Refer to Fact Pattern 2-1. According to the reasoning of the court in Case 2.2, In re the Exxon Valdez, QTC is liable because

a. harm was caused by an unfortunate accident. b. QTC showed reckless disregard for Small City’s residents and others. c. Rod exceeded the federal time limit. d. Small City should have better protected the water source.

ANSWER: B PAGE: 38 TYPE: N Objective: AACSB Communication Skill Level: AICPA Legal

6. Refer to Fact Pattern 2-1. Under the reasoning and the words of the court in Case 2.2, In re the Exxon Valdez, QTC’s conduct might be described as

a. “blamelessly faultless” and “unintentionally capricious.” b. “highly reprehensible” and “intentionally malicious.” c. “irregardlessly respectful” and “respectfully regardless.” d. “uniquely preoccupied” and “wantonly sleepless.”

ANSWER: B PAGE: 38 TYPE: N Objective: AACSB Communication Skill Level: AICPA Legal 26 UNIT ONE: THE FOUNDATIONS

7. Alpha Telecommunications, Inc., needs to reduce costs by downsizing. In determining which employees to let go, a business’s primary concern is always

a. its ethical duty to long-term employees. b. its profit margin. c. the legality of discharging older workers. d. none of the above.

ANSWER: D PAGE: 42 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

8. Home Furnishings Company (HFC) markets its products nationwide. When making a decision, HFC must take into account the needs of

a. employees only. b. owners and shareholders only. c. society, consumers, and the community only. d. all of the above.

ANSWER: D PAGE: 42 TYPE: + Objective: AACSB Reflective Skill Level: AICPA Risk Analysis

9. First Financial Corporation provides other firms with capital to expand operations. Questions of what is ethical involve the extent to which First Financial has

a. a legal duty beyond those duties mandated by ethics. b. an ethical duty beyond those duties mandated by law. c. any duty beyond those mandated by both ethics and the law. d. any duty when it is uncertain whether a legal duty exists.

ANSWER: B PAGE: 42 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Risk Analysis

10. Joy lies to her family. Under most circumstances, this is

a. familial, but not illegal or unethical. b. familial, illegal, and unethical. c. illegal only. d. unethical only.

ANSWER: D PAGE: 42 TYPE: + Objective: AACSB Reflective Skill Level: AICPA Critical FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER Thinking

11. Sven, the human resources director for Temp Employees Unlimited, Inc., attempts to comply with the law in dealing with applicants, employees, and clients. One of the challenges Sven faces is that the legality of an action is

a. always clear. b. never clear. c. sometimes clear. d. usually clear.

ANSWER: C PAGE: 44 TYPE: + Objective: AACSB Reflective Skill Level: AICPA Legal

12. Eve, the chief executive officer of Federated Corporation (FC), wants to ensure that FC’s activities are legal and ethical. The best course of Eve and FC is to act in

a. good faith. b. ignorance of the law. c. regard for the firm’s shareholders only. d. their own self interest.

ANSWER: A PAGE: 44 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Legal

13. In business negotiations, Cleo, the chief executive officer of Design Associates, Inc., follows “The Golden Rule,” which

a. encourages the accumulation of as much personal wealth as possible. b. mandates compassionate treatment of others in all situations. c. permits taking advantage of others in financial terms. d. requires an increase of business profits over a certain period.

ANSWER: B PAGE: 46 TYPE: + Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

14. Jack follows certain religious principles. With respect to the behavior of Jack and other adherents of his religion, its principles are most likely

a. absolute. b. changeable. c. flexible. 28 UNIT ONE: THE FOUNDATIONS

d. vague.

ANSWER: A PAGE: 46 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Critical Thinking FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER 15. Dona, an accountant for Excel Trends, Inc., attempts to apply the duty approach to ethical reasoning in conflicts that occur on the job. This approach is based on the idea that a person must

a. achieve the greatest good for the most people. b. avoid unethical behavior regardless of the consequences. c. conform to society’s ethical standards. d. place his or her employer’s interest first.

ANSWER: B PAGE: 46 TYPE: + Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

16. Tina, the chief financial officer for USA Products Corporation, attempts to apply Christian precepts in making ethical decisions and in doing business. In applying duty- based ethical standards that are derived from a religious source, Tina would consider the motive behind an act to be

a. irrelevant. b. the least important consideration. c. the most important consideration. d. the only consideration.

ANSWER: A PAGE: 46 TYPE: + Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

17. Transactional Corporation suggests that its employees apply the “categorical imperative” to ethical issues that arise at work. Under this standard, employees

a. categorize the issues according to legality, morality, and profitability. b. consider only the benefits that would accrue to them personally. c. look only at the result, regardless of the means to attain it. d. weigh the consequences that would follow if everyone took the same action.

ANSWER: D PAGE: 46 TYPE: + Objective: AACSB Reflective Skill Level: AICPA Critical Thinking 30 UNIT ONE: THE FOUNDATIONS

18. Matt, vice-president of sales for Natural Resources, Inc., adheres to religious ethical standards. Their application involves an element of

a. compassion. b. cost-benefit analysis. c. discretion. d. utilitarianism.

19. In making business decisions, Erv, a certified financial planner with Financial Security Corporation, attempts to apply his belief that all persons have fundamental rights. This is

a. a religious rule. b. the categorical imperative. c. the principle of rights. d. utilitarianism.

ANSWER: C PAGE: 47 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

20. Raul, the owner of Superior Engineering, Inc., adheres to the “principle of rights” theory. Under this theory, a key factor in determining whether a business decision is ethical is how that decision affects

a. the right determination under a cost-benefit analysis. b. the rights of others. c. the “right” thing to do. d. the right to make a profit.

ANSWER: B PAGE: 47 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Critical Thinking FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER 21. Bob, research manager for Agri-Products, Inc., applies utilitarian ethics to determine that an action is morally correct when it produces

a. the greatest good for Bob. b. the greatest good for the most people. c. the least good for the fewest people. d. the least good for the most people.

ANSWER: B PAGE: 47 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

22. Holly, a lawyer on the staff of International Group, applies the utilitarian theory of ethics in business contexts. Utilitarianism focuses on

a. moral values. b. religious beliefs. c. the consequences of an action. d. the nature of an action.

ANSWER: C PAGE: 47 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

23. Harry, a vice-president of Interstate Sales Corporation, does not apply utilitarianism to business ethical issues. One problem with utilitarianism is that it

a. gives business profits priority over production costs. b. ignores the practical costs of a given set of circumstances. c. justifies human costs that many find unacceptable. d. requires complex cost-benefit analyses of simple situations.

ANSWER: C PAGE: 47 TYPE: + Objective: AACSB Reflective Skill Level: AICPA Critical Thinking 32 UNIT ONE: THE FOUNDATIONS

24. Lee, an accountant, is subject to the accounting conventions, rules, and procedures that constitute generally accepted accounting principles (GAAP). GAAP are determined by

a. state courts. b. the American Bar Association. c. the American Institute of Certified Public Accountants. d. the Financial Accounting Standards Board.

ANSWER: D PAGE: 48 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

25. Tim is an accountant. Tim’s violation of generally accepted accounting principles and generally accepted auditing standards

a. does not indicate that Tom was negligent. b. is prima facie evidence that Tom was negligent. c. precludes Tom from raising any defense against a negligence claim. d. will never subject Tom to liability.

ANSWER: B PAGE: 49 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Legal

26. Tom is an attorney. Tom’s conduct is governed by rules of professional conduct established by the state in which he is licensed, and the Code of Professional Responsibility and Model Rules of Professional Conduct drafted by

a. federal courts. b. the American Bar Association. c. the American Institute of Certified Public Accountants. d. the Financial Accounting Standards Board.

ANSWER: B PAGE: 49 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Legal

27. Owen is an attorney. Paula is a certified public accountant. These professionals are subject to standards of conduct established by

a. codes of professional ethics only. b. court decisions and state statutes only. c. codes of professional ethics, court decisions, and state statutes. d. none of the above. FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER ANSWER: C PAGE: 49 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Legal 34 UNIT ONE: THE FOUNDATIONS

28. Alex, an attorney, allows a statute of limitations to lapse on a claim by Biotech Research Associates, a client. Alex

a. can be held liable for malpractice. b. has violated an ethical standard but cannot be held liable. c. is subject to criminal penalties under the statute of limitations. d. will be automatically disbarred.

29. Haruo is an accountant whose clients include International Properties, Inc. For a violation of securities laws, Haruo may be subject to

a. civil and criminal penalties. b. civil penalties only. c. criminal penalties only. d. neither civil nor criminal penalties.

30. Leo, an accountant, prepares for Midwest Corporation a financial statement that omits a material fact. This statement is included in Midwest’s registration statement, which Nick reads before buying its stock. Nick suffers a loss on the deal. Under securities law, Leo can avoid liability to Nick by showing that Leo

a. did not have a contract with Nick. b. did not prepare the registration statement. c. exercised due diligence in preparing the financial statement. d. lacked criminal intent.

ANSWER: C PAGE: 50 TYPE: N Objective: AACSB Reflective Skill Level: AICPA Legal

31. Ben helps Corporate Office Park, Inc., prepare a false tax return. The Internal Revenue Code makes aiding or assisting in the preparation of a false tax return

a. a felony punishable by a fine and imprisonment. b. a felony punishable only by a fine. c. a misdemeanor punishable only by a fine. d. a petty offense punishable only by a fine. FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER ANSWER: A PAGE: 50 TYPE: N Objective: AACSB Analytic Skill Level: AICPA Legal 36 UNIT ONE: THE FOUNDATIONS

32. Richard, an accountant, may be found criminally liable for violations of

a. the Securities Act of 1933 only. b. the Securities Exchange Act of 1934 only. c. the Securities Act of 1933 and the Securities Exchange Act of 1934. d. none of the above.

33. Alice prepares tax returns for Big Stores, Inc., and other business firms. Under the Internal Revenue Code, Alice may be liable for

a. only negligent understatement of a client’s tax liability. b. only willful understatement of a client’s tax liability. c. negligent or willful understatement of a client’s tax liability. d. none of the above.

34. Lucy is an accountant who prepares her clients’ tax returns. Mark is not an accountant, but he also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on

a. Lucy only. b. Mark only. c. Lucy and Mark. d. none of the above.

35. International Marketing Corporation’s side payments to government officials in exchange for favorable business contracts in foreign countries are considered, in the United States,

a. illegal and unethical. b. illegal only. c. neither illegal nor unethical. d. unethical only.

ANSWER: A PAGE: 58 TYPE: N FULL FILE AT HTTP://TESTBANK360.EU/TEST-BANK-THE-LEGAL-ENVIRONMENT-TODAY-5TH- EDITION-MILLER Objective: AACSB Reflective Skill Level: AICPA Critical Thinking

ESSAY QUESTIONS 1. Fine Clothes Company buys clothing assembled by Gamma, Ltd., a foreign firm that employs young children for long hours and low pay. Gamma’s nation does not enforce its child labor laws. Human International Politics (HIP), a political activist organization, discovers Fine Clothes’ connection to Gamma and plans to reveal this information. Before HIP does so, however, Fine Clothes publicly releases the information itself and announces that it is severing its relationship with Gamma. Fine Clothes publicizes its action in its advertising, and the company’s sales and profits increase, apparently as a direct result. Has Fine acted unethically in any way? From an ethical perspective, is Fine Clothes’ conduct in this situation more important than whatever its motive might be? ANSWER: Fine Clothes has not acted unethically in any way in this problem. Ethical behavior can sometimes generate sufficient good will to warrant practicing it out of a desire for increased profits. By the same token, unethical behavior can sometimes generate enough bad publicity to warrant avoiding it out of the same desire. A business firm’s activities that are perceived as ethical and receive wide publicity can benefit the firm’s owners in the short run-and even in the long run if the firm’s enhanced public image continues to attract more consumers to its products. There is nothing unethical about making a profit. It is the behavior that generates the profit that can be questionable. Business ethics thus has a practical element. A business firm should act in its own best interest. A firm interested in profits should also be interested in the public’s opinion. As for a motive beyond the incentive to make money, it can be difficult to determine, especially in the complicated world of business ethics. Thus, conduct is probably the more effective measure of ethical behavior, and consequently more important than motive. PAGES: 35–39 & 42–46 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Decision Modeling 2. ABC DVD Manufacturing, Inc., has to decide whether to close a plant, which will result in the lay-off of fifty employees. ABC may weigh the costs of doing against the benefits. If the benefits are greater than the costs, can closing the plant be ethically justified, considering the effect on the employees? ANSWER: The answer depends on which system of ethics is applied. From a utilitarian perspective, under a cost-benefit analysis, the plant will likely be closed, because closing it would benefit the greatest number of persons—future and other cur- rent employees, as well as shareholders. 38 UNIT ONE: THE FOUNDATIONS

PAGE:42 TYPE: = Objective: AACSB Reflective Skill Level: AICPA Decision Modeling