Exam 8: Ethical Leadership and Decision-Making in Accounting

A) Accountants are regulated by state board of accountancy
B) Accountants are expected to place the public interest above all else
C) Accountants are obligated to follow a strict code of ethics
D) Accountants are answerable to firm management, not their clients

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The ethical leader understands that posi...

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A) Dennis Kozlowski's use of corporate resources for personal purposes
B) Betty Vinson's decisions to go along with financial wrongdoing
C) Jeff Skilling's policy of "rank and yank"
D) Whistleblowing by Cynthia Cooper

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Authentic leaders are focused on buildin...

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A) Values-based leadership
B) Sensitivity to ethical dilemmas
C) Adherence to organizational norms even if it means compromising one's values
D) Leader ethicality

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A) Enable ethics and values to take place without fear of retaliation
B) Enable ethics and values to shine through the fog of beating the competition and meeting financial projections
C) Refrain from using non-GAAP measures of earnings
D) Create an environment that fosters short-term shareholder value

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B

A) Whether a firm hires and promotes individuals who fit into the prevailing firm culture and whether individuals unable to fit leave
B) Whether a firm fires individuals who do not fit into the prevailing firm culture
C) Whether individuals choose to work for a particular firm
D) Effective leadership and followership

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A) The external auditors went along with the fraud
B) The board of directors managed the fraud
C) Checks and balances were eliminated and organizational culture was compromised
D) There was no hotline to report financial fraud

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A) AICPA Code of Professional Conduct
B) Rules and regulations of the SEC
C) Stated values and management practices
D) Moral intensity and management practices

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A) Decision makers will act in accordance with their own ethical values
B) Decision makers are aware of the ethical implications of their intended actions
C) Organizations will foster ethical behavior
D) Organizations will establish an ethical tone at the top

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A) A significant positive correlation exists between authentic leadership and dysfunctional audit behaviors
B) A significant negative correlation exists between authentic leadership and dysfunctional audit behaviors
C) Audit seniors more frequently prematurely sign off on audit work than under-report time
D) Audit seniors act on their own values regardless of their perceptions of the firm culture

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A) Magnitude of consequences of the moral act
B) Degree of social consensus that the moral act is unethical
C) Feelings of proximity of the moral agent to the moral act
D) All of the above are relevant factors

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A) Moral intensity affects the intention to report wrongdoing
B) Moral intensity is independent of the intention to report wrongdoing
C) Ethical leaders ignore the magnitude of consequences when deciding whether to blow the whistle
D) Ethical leaders base their decision whether to blow the whistle on temporal immediacy of the effect of the moral act

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Ethical leader behaviors help establish ...

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An understanding of ethics begins with an analysis of values, both individual and organizational. Effective managers and leaders must be aware of their values, morals, and system of ethics and ethical decision making. Good character and integrity are integral components of ethical leadership. There must be a connection between a sound value system and the ability of the leader to use these values in his/her decision making. The Josephson Institute's Six Pillars of Character might easily be applied to a business setting. These six pillars are: Trustworthiness - honesty, integrity, reliability, loyalty, keeping promises and not deceiving others. Respect - using the Golden Rule or treating others as you wish to be treated, in addition to being courteous, listening to others, and accepting individual differences. Responsibility - accountability, self-control, the pursuit of excellence, and considering consequences of our actions prior to making them. Fairness - playing by the rules, not taking advantage of others, making informed judgments without favoritism or prejudice, and not blaming others. Caring - kindness, compassion, and altruism, acting to minimize hardship and to help others whenever possible. Citizenship - working to make one's community better, protecting the environment, making our democratic institutions work, and operating within the law. Acting in accordance with these ethical values creates an ethical environment that, in turn, fosters buy-in by employees. Acting in accordance with nonethical values (wealth, power, prestige) is more likely to promote self-interested behavior that places the interests of the client, firm, or one's self-interest ahead of the public interest. Accounting is a community with established standards that underlie ethical behavior and enable professionals to act with integrity. Integrity is the heart and soul of ethical behavior because it provides the proper ethical perspective to deal with internal and external pressures and set them aside to do the right thing. Once an ethical environment is created, employees and management develop trust in one another. Good leaders garner trust. Trust can be developed in many ways but most fundamentally through leading by example. Leaders must do ethical things on a consistent basis in plain and full view for their constituents to see. Transparency is critical in creating an ethical environment. For leaders to facilitate solutions to ethical dilemmas in the workplace, written guidelines in the form of a code of conduct are useful. A code of conduct is intended to be a guide and reference for users in support of day-to-day decision making. It is meant to clarify an organization's mission, values and principles and to link them with standards of professional conduct. In the accounting profession these standards are embodied in the codes of professional ethics of groups such as The American Institute of CPAs (AICPA) and the Institute of Management Accountants (IMA). The AICPA Code definitively places the needs and interests of the public ahead of those of a client, firm, or self-interest. The public interest ideal imparts ethical obligations to perform services with objectivity, due care, and exercise a healthy dose of skepticism in gathering and evaluating evidence. Codes require the commitment of the company's leaders and other higher levels of management, and should address the needs of the various constituencies and stakeholders in the organization. A code is an open disclosure for the way an organization operates. It provides visible guidelines for behavior. A well-written and thoughtful code also serves as an important communication vehicle that reflects the covenant that an organization has made to uphold its most important values, dealing with such matters as its commitment to employees, its standards for doing business and its relationship with the community. A code is also a tool to encourage discussions of ethics and to improve how employees/members deal with the ethical dilemmas, prejudices, and "gray areas" that are encountered in an organization/community such as the accounting profession. Ethical dilemmas occur when important values come into conflict, and the decision maker (the leader, in many cases) must make a choice between these values. Since both values are important, success and honesty, for example, priorities must be assigned to values and one takes precedence over the other. To the extent possible, a careful balance must be preserved to maximize both values in order to avoid unethical decision making. Kidder offers two classifications of ethical dilemmas. In the first type of dilemma, a right versus wrong dilemma, ethical issues emerge when a core moral value has been violated or ignored. When honesty is an important value to a person, and another person is found to be acting dishonestly, it is generally acknowledged that the action was unethical. In this case, ethics is simply the obvious difference between what is right and what is wrong. In the second type of dilemma, a right versus right dilemma, however, ethical issues emerge when two core values come into conflict with each other. When one important value raises powerful moral arguments for one course of action, while another value raises equally powerful arguments for an opposite course, we must make a choice since we can't do both. In such cases, ethics is a matter of right versus right. Kidder also identifies four paradigms of dilemmas. In the first category of truth versus loyalty, honesty or integrity is in conflict with commitment, responsibility, or promise-keeping. In the justice versus mercy dilemma, fairness, equity, and equal application of the law conflict with compassion and care. The individual versus community paradigm is geared toward us versus them, self-versus others, or smaller versus larger groups. And finally, the short term versus long term dilemma deals with immediate needs versus future. In his 2005 book, Moral Courage, Kidder refers to the need for "moral courage" when making difficult moral decisions. His definition of moral courage is the intersection of three concentric circles: applying values, recognizing risks, and enduring the hardship. The last one, "enduring the hardships" is the perseverance piece of the moral courage model. A leader has to be willing to persevere and stick with the "right" decision, and ignore distractions, faulty rationalizations, and justifications. In this sense the Giving Voice to Values methodology can help to respond to reasons and rationalizations given to support questionable or unethical behavior. Moral courage of a leader requires follow through and going beyond merely thinking and talking about doing the right thing. It is the actual decision-making piece that defines the ethical leader. Kidder also points out that the act of "whistle-blowing" is an example of moral courage. Whistle blowing consists of an individual acting with the intention of making information public, and then conveying the information to parties outside the organization who then makes it public and a part of the public record. In a True whistle blowing scenario, the information has to do with possible or actual nontrivial wrongdoings in an organization. As we have discussed throughout the book, before blowing the whistle in accounting, a prescribed process must be followed that begins with making it known to top management including the board of directors that a material misstatement exists in the financial statements. Under Section 10A of the Securities Exchange Act of 1934, the accountant should: Determine whether the violations have a material effect, quantitatively or qualitatively, on the financial statements. If yes, has management, or the board of directors, caused management to take remedial action, including reporting externally, if necessary? If no, then the individual must make a formal report of the issue with conclusions on the effect and provide the report to the board of directors. After being informed, the board of directors has one business day to report the matter to the SEC and send a copy of the report to the accountant. If the accountant does not receive a copy by that time, then the accountant should report to the SEC within one business or resign from the engagement. Resignation does not preclude informing the SEC. If the accountant follows these prescribed steps, then there will not be a violation of the confidentiality obligation in the AICPA Code. The accountant could turn into a whistleblower under the Dodd-Frank Financial Reform Act by either waiting 120 days to see if management takes corrective action and, if not, report the matter to the SEC. Alternatively, the accountant can report if she believes that the disclosure is necessary to prevent substantial injury to the financial interest of an entity or its investors and/or reasonably believes the entity is impeding investigation of the misconduct. Ultimately, the ideal solution for promoting ethical behavior is not a punitive one, but a positive approach by the leaders of organizations. Ethical behavior must be practiced by the leaders and modeled by those they lead. Ethical decision making should be acknowledged and rewarded. Ethics and leadership go hand in hand and ethics is the heart of leadership.

A) Exit the organization, voice discontent, discuss matters with the board of directors
B) Exit the organization, remain silent, report the matter to the external auditors
C) Exit the organization, remain silent, voice discontent
D) Exit the organization, blow the whistle, report the matter to the authorities

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C

A) Audit firm organizational structures
B) Audit firm ethical leadership
C) Personal characteristics of whistleblowers
D) Situational variables

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A) Advocate a perspective that leaders have a responsibility to serve their followers by helping them to achieve followers' goals
B) Servant leadership is the flip side of authentic leadership
C) Promote a culture that enhances organizational outcomes
D) Help followers to fulfill their needs by modeling ethical values, attitudes and behaviors

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