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ETHICS

ETHICS. Group members: Ngui Siew Lee 110465 Christina Foo 110599 Wong Siew Yi 110607 Cheong Soh Keat 110618. ENRON CORPORATION. number seven ranking in the Fortune 500 six-time consecutive winner (1996 to 2001) of Fortune’s “most innovative company in the United States”.

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ETHICS

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  1. ETHICS Group members: Ngui Siew Lee 110465 Christina Foo 110599 Wong Siew Yi 110607 Cheong Soh Keat110618

  2. ENRON CORPORATION • number seven ranking in the Fortune 500 • six-time consecutive winner (1996 to 2001) of Fortune’s “most innovative company in the United States”

  3. ENRON CORPORATION • October 16, 2001: announced a $618 billion reduction in third quarter profits and a $1.2 billion loss in shareholder equity • November 19, 2001:filed further restatement of its financial statements with the SEC to reduce stockholder equity by $258 million in 1997, $391 million in 1998, $710 million in 1999, and $754 million in 2000. • Three weeks later, Enron files for bankruptcy protection • Thus, in “a span of less than two months during the autumn of 2001,” Enron fell from business idol to congressional doormat, or somewhat more importantly, from the new business model to a model of business greed and ultimate failure.

  4. Other Facts of unethical behavior • In April of 1998, Cendant announced plans to restate its 1997 earnings because of major “accounting irregularities” that resulted in Cendant’s overstating income of up to $115 million. • Moreover, Sunbeam Corp. restated its 1996 and 1997 financials because of accounting discrepancies in 1998

  5. Evidence from Malaysia • Public confidence was badly shaken by the collapse of the deposit-taking cooperatives, and by the Bank Bumiputra and Pan-Electric fiascos • All of these unethical behavior recently turned the public’s attention to the accounting profession, and they wondered, “Where were the auditors?”

  6. Ethics - definition • a system or code of conduct based on moral duties and obligations that indicate how we should behave; it deals with the ability to distinguish right from wrong and the commitment to do what is right • Accounting professionals are guided in their behavior by provisions of a code of ethics that has been established by professional associations.

  7. MIA By-Laws (On Professional Conduct and Ethics) • are applied to all members of the Institute – including those in public practice, industry, government, and education – in the performance of their professional responsibilities. • have been framed with the objective that members exhibit the highest standards of professionalism and professional conduct that are expected of the profession.

  8. MIA By-Laws (On Professional Conduct and Ethics) • form the basic tenets of ethical and professional conduct of all members. • In accepting or continuing a professional assignment or occupation, a member shall always act with integrity, objectivity, independence and impartiality

  9. Ethical issues • arise in situations in which there is actual or potential harm to an individual or group. • issues also arise in situations in which there are actual or potential conflicts of interest. Conflicts may occur because individuals have divergent interests.

  10. Sarbanes-Oxley Actof 2002 • created an environment of heightened scrutiny of corporate behavior in general • banned audit firms from providing any financial information system design and implementation, internal audit and “certain other services” to their client

  11. Discussion of current issues • Accountant dilemma • Audit expectation gap • Auditors as whistleblower?

  12. Issue 1 Accountant dilemma

  13. Accountants’ Dilemma:Compliance versus Confrontation

  14. How the Dilemma faced by Private Accountants Happens? Level of oversight: Perwaja Steel Sdn. Bhd. 2nd Dilemma Shareholders 1st Dilemma Accounting Accounting Director Manager Board of Directors (Line Positions) Managements (Staff Positions)

  15. 1st Dilemma:Accountant Manager Received letter as an evidence of transaction to be recorded Suspected fraud Comply or Confront?

  16. 2nd Dilemma:Accountant Director Prompted by Shareholders Not enough evidence to support transaction Suspected fraud Comply or Confront?

  17. Decision … Compliance Confrontation Professional Ethics < Professional Ethics > Career Career Donald V. Saftner (1988): Career is one of the most important facets and promotion is the most comprehensive and overt sign of progress.

  18. Accountant Manager Intimidation threats Accountant Director Self-review threats Why Accountant act beyond their Professional Act?

  19. Issue 2 Audit expectation gap

  20. The Role of Auditors • audit the accounts that stated in the financial statements to give a true and fair view and whether the accounts and the part of the ‘Directors’ pay and benefits report to be audited have been properly prepared in accordance with the Companies Act, 1965.

  21. What is Audit Expectation Gap? • The expectation gap is a factor of the levels of expected performance as envisioned both by the independent accountant and by the user of financial statements. The difference between these levels of expected performance is the expectation gap. • There is evidence of a gap between the public’s perception of the role of the audit and auditors’ perception of the role.

  22. Public expectation • Integrity & Objectivity • Confidentiality • Competence & due care • Independence

  23. Audit Expectation Gap LOW integrity & objectivity, confidentiality, competence & due care, independence LACK of auditors’ ethics LARGE audit expectation gap

  24. Audit Expectation Gap HIGH integrity & objectivity, confidentiality, competence & due care, independence EXCELLENT of auditors’ ethics SMALL audit expectation gap

  25. Evidence … PERWAJA STEEL UEM purchase of SDN BHD RENONG Colluded with the corp Ignore the overstatement director to manipulate of the company’s assets lower profit figure for director benefit LACK OF AUDITORS’ ETHICS

  26. Issue 3 Auditors as whistleblowers?

  27. Who are whistleblowers? • Whistleblowers are insiders who seek to rectify perceived organisational wrongdoing by raising their concern in public. Usually this follows unsuccessful earlier efforts to obtain a hearing and remedial action through internal organisational channels.

  28. Continue… • Whistleblowing is a deliberate non-obligatory act of disclosure, which gets onto public record and is made by a person who has or had privileged access to data or information of an organisation, about non-trivial illegality or other wrongdoing whether actual, suspected or anticipated which implicates and is under the control of that organisation, to an external entity having potential to rectify the wrongdoing.

  29. External Statutory Audit • External auditors are not employees of the target organisation, but they have privileges to access to the private information. • External auditors are perceived as whistleblowers when they make disclosure in the financial statements. These disclosures have the characteristics of whistleblowing except for they are authorised, obligatory acts.

  30. Continue… • However, audit disclosures do not express dissent or entail loyalty conflicts. • Therefore, audit disclosures are not whistleblowing action.

  31. Ethical dilemma • A person granted access to an organisation’s private affairs owes it a duty of confidentiality. • Whistleblowing is disloyal because it is a general contravention of confidentiality, a rights over the data/ information which are disclosed.

  32. Internal Audit • Internal auditors make authorised disclosure but only through communication channels prescribed by management, since their independence is conditional on management support. • The conclusion is that these disclosures are not whistleblowing acts.

  33. Continue… • Some internal auditors may blow the whistle but if so they enact a different role, perhaps as professional or concerned citizen. • Probably the knowledge revealed is obtained through their work but its public disclosure is not work related; it is an act of disobedience and a disloyal breach of trust which offends their organisation’s privacy and rights over information.

  34. Other Functions • Auditors also provide voluntary audits and accountants offer a range of services besides auditing, covering non-financial services as well as more traditional record keeping and tax and investment advising. • Confidentiality and other professional ethical principles and rules apply to all client services and regardless of how they are supplied.

  35. Recommendations of Issue 1 • Role play by management • Instituting quality control and review procedures • Ensures that members of the firm are independent

  36. Recommendations of Issue 2 • Establishing stronger auditing and assurance standards • Continually update the code on professional ethics • Sanction members who do not comply with it

  37. THANK YOU

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