Chapter 6

Greed, Corruption, and Collusion

As your favorite late-night television program cuts to a commercial break, a balding man appears on your screen, wearing a bad toupee that resembles a dead squirrel. His demeanor bespeaks a used car dealer, but his words suggest otherwise.

“April 15 means more than Easter bunnies,” he proclaims. “I'm Pete the Cheat, and I will beat your tax return from last year…even if I have to claim your pet hamster as a dependent! Just pay me 30% of your tax savings as my fee. And if the IRS gives you an icy cold stare, my bag of green bribe-ola will make them melt away like snow in summer. Remember: The Taxman can be beat—call Pete the Cheat.”

Few accountants run unseemly ads like this fictionalized example. Nonetheless, accounting is both a profession and a business. As a result, the dignified ethical precepts of a profession sometimes clash with some accountants' lust for undeserved wealth.

This chapter examines the seedy side of business—bribes, kickbacks, secret commissions, referral fees, and insider trading—and accountants' responsibilities to confront and prevent business wrongdoing.

THE INSTINCTIVE URGE OF GREED

The Nature of Greed

As a Bruno Mars tune puts it, “I wanna be a billionaire so freakin' bad, [so I can] buy all the things I never had.”1 From kings to conquerors and scammers to scoundrels, all societies have members with an insatiable desire to become rich. The extraordinary attainment of wealth has led to transformative philanthropy in the areas of education, the arts, medical research, and global health. However, in some cases, it merely has led to ruthless behavior and conspicuous consumption.

Greed is not the mere quest for wealth. It is the unbridled pursuit of more wealth than a person reasonably needs, with indifference to the rights of others. A fine line often exists between acceptable ambition and abhorrent avarice. According to an old proverb, gluttony and greed are reached when a person's “eye is larger than his belly.”

Greed has its financial rewards, but it is rarely without risk. As Leonardo da Vinci observed in the 15th century, “He who wishes to be rich within a day, will be hanged within a year.” More recently, the mantra that “greed is good” was immortalized by the cinematic character Gordon Gecko. In the movie Wall Street, rapacious business tycoon Gecko proclaims that “greed is right, greed works, greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”

But is greed really right?

Billionaire investor Leona Helmsley certainly seemed to believe that greed was right for her. While accumulating a fortune in Manhattan real estate, she shrugged off her infamous reputation for not paying bills, cheating on taxes, and depriving her employees of their dignity. In New York, she deservedly was nicknamed the Queen of Mean.

While amassing great wealth, Helmsley also amassed innumerable enemies. In the end, it was these “little people,” as she called them, who led to her undoing. For years, Helmsley had falsely disguised personal expenditures on her mansion as business tax deductions. When Helmsley refused to pay her building contractor, he informed the tax authorities, and others corroborated Helmsley's criminal intent to evade taxes. According to testimony from Helmsley's maid, for instance, Helmsley arrogantly had proclaimed that, “We don't pay taxes. Only the little people pay taxes.”2 The jury was unsympathetic to Helmsley, and she ultimately was sentenced to 16 years in prison for tax fraud.

After this public humiliation, one might have expected Helmsley to reform her ways to improve her reputation and self-image. Until her death, however, Helmsley remained unrepentant and mean-spirited. According to court records, Helmsley's will left $12 million for the care of her dog, which was to be spent on gourmet food, a bodyguard, and chauffeur-driven limousine visits to the veterinarian. As for Helmsley's four grandchildren, two were entitled to income from a trust fund on the condition that they make periodic visits to the family burial site. The other two received nothing.

The Biological Origins of Greed

Neuroscientists have shown that the quest for material wealth, like the lust for power or sexual conquest, elevates the chemical dopamine in our brains, making us feel good. For many, though, this high does not last very long. Once great wealth is achieved, people often experience an emotional letdown, preferring the chase for financial rewards over the actual attainment and consumption of wealth. As music mogul and philanthropist David Geffen wryly observed, “Anyone who thinks that money will make them happy…doesn't have money.”

Just as some have a biological craving for gobs of money, others lack this appetite, preferring nonmonetary thrills, such as hugging a pet, slam-dunking above the net, or dancing a pirouette. For instance, it was a drive for self-satisfaction, not money, that led UCLA professors Vinton Cerf and Leonard Kleinrock, along with computer scientist Robert Kahn, to become early pioneers in the creation of the Internet. Like modern-day Christopher Columbuses, these gentlemen helped discover the new world of the Internet, with Cerf developing and coining the term Internet Protocol and Kleinrock successfully transmitting the first email ever.3 These gentlemen have received widespread acclaim in the scientific community, but they have otherwise lived their lives in relative obscurity, earning comparatively modest academic salaries. Do they lament that they never made vast fortunes from their discoveries? Not at all, they say. The joy of solving challenging puzzles and contributing to mankind were the only rewards they desired. Professor Cerf confesses to having only one regret:

I didn't get to play with this stuff until I was 28 [so] I often envy the kids who are 8 years old and hacking the Net. They got to do it 20 years before I did. I had to go off and invent it.4

Even for those who crave money, the brain region that responds to greed impulses often is countermanded by a different brain sector's strong reaction to injustice. Thus, in most people, the instinct to be greedy is neutralized by competing biological forces. However, when a person's infatuation with money overpowers the desire for fair play, greed takes over, often resulting in the unscrupulous disregard for others. This may manifest itself through bribery and other acts of corruption.

As a quick test, consider the following situation: After you and a stranger have been seated at a table, a researcher gives $100 cash to the stranger. The instructions are simple: “The stranger may divide the $100 between the two of you in any amounts desired. If you agree to the allocation, you each get to keep your share of the money. But if you disagree, neither of you gets any money.” You further are told that this event will occur only once, and you will never see each other again. If the stranger offers you $3 and plans to keep the other $97, what would you do? Accept the $3? Or, walk away, leaving both you and the stranger with nothing?

From a purely economic standpoint, receiving $3 of course beats getting nothing. Thus, if you are a simple profit-maximizer, you should take the amount offered, however small. Upon being offered such a tiny fraction of the $100 available, though, many people react with strong resentment and choose to teach a lesson to this avaricious stranger by exiting the game, leaving both parties with nothing. In effect, people who have an intense belief in fairness and an intolerance for greed, gladly pay $3 for the pleasure of punishing this stranger.5

Figure 6-1

BRIBERY

The Nature of Bribery

At its core, bribery is betrayal. Bribery occurs when one person offers something of value to entice another person to betray his duties. Bribery can be classified into two subcategories.

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Figure 6-2 Official Bribery.

Official bribery occurs when public officials accept or are offered items of value in return for sacrificing the best interests of the citizens they have been entrusted to serve. For example, official bribery takes place if a public official awards a government contract to a particular supplier in return for something of value. Throughout the world, official bribery is a serious crime. China treats bribery particularly harshly, occasionally imposing death sentences on officials who accept bribes.6

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Figure 6-3 Commercial Bribery.

Commercial bribery arises when private-sector employees accept a valuable inducement to act contrary to their employers' best interests. Commercial bribery is a clear abrogation of an employee's ethical and contractual duties, and it rightfully subjects violators to employer disciplinary actions to recover ill-gotten gains. Unlike official bribery, views on commercial bribery vary greatly among countries. Some countries such as Canada and Great Britain make commercial bribery a crime, but others such as Mexico and Saudi Arabia do not.7 Even within the United States, states vary in their views about whether commercial bribery is a crime. Some states, such as Texas, specifically makes commercial bribery a felony if an accountant “intentionally or knowingly solicits, accepts, or agrees to accept any benefit” that improperly undermines his professional duties.8 Other states, however, primarily view commercial bribery as an employment breach that should be enforced by an employer against a wrongdoing employee. In a few of these states, commercial bribery is a misdemeanor;9 in others, such as Wyoming, the crime of bribery only applies to “official servants” acting in their official capacities, but not to commercial bribery at all.10

Identifying Bribes

In movie depictions, bribery usually involves a shadowy figure who delivers a briefcase containing unmarked bills while saying something cheesy like “here's da sugar, Sweet Lips…it's an offer you can't refuse.” Consistent with these fictionalized portrayals, bribery traditionally requires a quid pro quo in which one person explicitly promises another person preferential treatment in return for a financial reward. In California, for instance, both conspirators are guilty of commercial bribery when an employee “solicits, accepts, or agrees to accept money or anything of value from a person…corruptly…in return for using or agreeing to use his or her position for the benefit of that other person.…”11 As an example, when former KPMG partner Scott London got a payoff for divulging confidential client tips as part of an insider trading scheme, the FBI videotaped him in a store parking lot receiving a paper bag filled with $70,000 cash.12 In most cases, though, bribery plots are carefully concocted and meticulously concealed. Three techniques commonly are used.

First, companies often utilize intermediaries to pay bribes so they can later deny their involvement in the bribery process. Although the use of so-called marketing consultant middlemen merely is a subterfuge, companies often use intermediaries as a barrier against detection.

Second, beneficiaries of bribes often obscure their identities from detection by directing bribes to family members or affiliated entities. For example, rather than receive bribes personally, public officials often ask that payments be made to their supposedly independent re-election campaign fund or to a business controlled by a family relative.

Third, to obscure the existence of the bribe itself, financial rewards are often integrated into otherwise legitimate payments for goods or services. To hide a cash bribe to a middleman, for instance, a briber might agree to deliberately pay an inflated price that exceeds the fair price of goods or services.

Combating Bribery

To combat clever bribery tactics, 41 countries have joined together with the Organization for Economic Cooperation and Development, or OECD, to create tough international rules, known as the Anti-Bribery Convention. This agreement is patterned after the U.S. Foreign Corrupt Practices Act, which is limited in scope to criminalizing the bribery of public officials, and the United Kingdom's Bribery Act of 2010, which makes all forms of bribery illegal.

Figure 6-4

The OECD's Anti-Bribery Convention defines bribery expansively, mandating that “enterprises should not, directly or indirectly, offer, promise, give, or demand a bribe or other undue advantage to obtain or retain business or other improper advantage.”13 By outlawing indirect payments, schemes that involve intermediaries do not escape the purview of the antibribery rules. Also, an enterprise cannot delegate broad authority to others and then claim ignorance of their corrupt activities.

Under the U.S. Foreign Corrupt Practices Act, companies and their executives have been found guilty of bribery for acting with “conscious disregard” or “willful blindness” to probable bribery violations. Individuals convicted of bribery can be imprisoned for up to 20 years and fined up to $5 million for each violation. Employers are prohibited from reimbursing employees for their costs and fines. Companies also can suffer collateral consequences. For example, a conviction under the Foreign Corrupt Practices Act might result in the company being denied certain export privileges and can result in debarment. Debarment is a ban on selling to the U.S. government.

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Figure 6-5 Percentage of Executives Who Believe That Corruption Is Pervasive in This Region.14

The Foreign Corrupt Practices Act has an extremely broad reach. It encompasses bribes involving foreign-owned companies, private companies as well as public companies, and foreign subsidiaries of U.S. companies. In addition to prohibiting bribes to public officials, it covers improper payments to managers at government-owned enterprises, such as utilities and railroads.

Certain acts, however, are exempted by the Foreign Corrupt Practices Act. In some countries, payments to low-level government employees for prompt service are so commonplace that the Foreign Corrupt Practices Act had to refrain from outlawing these so-called facilitation payments. Accordingly, disbursements for accelerating routine government services, such as the issuance of business licenses, establishing water and power connections, and scheduling construction permit inspections are not prohibited. The key distinction between a bribe and a facilitation payment is that a bribe is paid to acquire a business opportunity or benefit to which a person is not already entitled, but a facilitation payment is paid to expedite a nondiscretionary service. In practice, the line between these two concepts is blurry and indistinct.

The Foreign Corrupt Practices Act also permits companies to provide foreign officials with meals, travel, lodging, and entertainment as long as these expenditures are reasonable in amount and not intended to influence a foreign official's actions. To avoid being characterized as improper, payments ideally should:

  • Be made to vendor entities, rather than directly to the participant
  • Be disclosed to the organization that the official represents
  • Be made to the best-qualified official who was chosen to participate based on predetermined, merit-based criteria
  • Be properly documented by invoices and canceled checks
  • Be properly disclosed in the disbursing enterprise's accounting records
  • Not be extravagant or excessively luxurious

When in doubt, a company can get an advance ruling from the U.S. Attorney General's Office about whether a proposed disbursement violates the law.

Modest gifts to foreign officials as tokens of gratitude also are acceptable, as long as they are customary and reasonable for an occasion, accurately disclosed in a company's accounting records, and preferably, transferred openly in public view. For example, it ordinarily would be acceptable to commemorate a foreign official's marriage by sending a modest wedding present.

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Figure 6-6 Percentage of Executives Who Believe It Is Acceptable for a Struggling Company to Give Personal Gifts to Obtain or Keep Customers.15

Maintaining Accurate Accounting Records

To avoid accusations of paying bribes, enterprises should properly substantiate and disclose the true nature and purpose of an expenditure. Payments should not be described with deceptive labels, such as Miscellaneous Fees or Promotional Write-Offs. The Foreign Corrupt Practices Act requires “reasonable detail,” but recognizes that companies may balance the administrative costs of detailed reporting against the benefits.

Also, organizations should establish adequate internal controls to verify and substantiate the propriety of expenditures. Illegal acts always are considered to be material events for a publicly traded company, so bribery payments cannot be ignored, even if the numerical amounts involved might otherwise fall below an immateriality threshold.

Bribery and the Accounting Profession

Receiving Bribery Offers

It may seem unimaginable, but accountants have to be prepared for the possibility that they may one day be offered gifts, preferential treatment, or other items of value to improperly influence their actions. The IFAC Code recognizes that the mere fact that an accountant has been offered a bribe, let alone accepted one, rocks the very foundations of the accounting profession.16

After evaluating the ethical threats that a bribery offer presents, accountants must seriously consider informing superiors at their workplace and, if applicable, family members who might be approached to help indirectly influence the accountant. Also, accountants may consider informing others, such as the employer of the person who offered the bribe or a professional organization that grants the offender a license or membership status.17

Because of the large scale of many government projects and the commonplace use of facilitation payments in certain developing countries, government accountants are particularly likely to be confronted with offers of bribery offers. The Association of Government Accountants' Ethics Code reminds its members that the public is the “government's most important customer,” and that the receipt of gifts, favors, preferential treatment, and after-the-fact “expressions of gratitude” are improper. Government accountants are also, of course, subject to strict criminal rules in all jurisdictions concerning official bribery.18

Pressures to Make Bribery Offers

Accountants, especially those working in industry, also might be approached to give inducements to influence others' actions. Pressure to engage in bribery may come from peers or superiors from within the organization where an accountant works, as well as from outsiders. Accountants pressured to improperly influence others' conduct are urged to consider a wide range of responses, including resigning from their employer.19

Detecting Bribes

Forensic accountants are accountants who have the training and investigatory skill to detect fraud, embezzlement, and other improper payments. To guard against illegal bribery payments, forensic accountants suggest that the following should be examined carefully:

  • Licenses, import duty fees, and other permits required to do business in foreign countries. Although facilitation payments to expedite routine services are legal under the Foreign Corrupt Practices Act, payments that induce government officials to give companies undeserved benefits and favors are illegal.
  • Petty cash funds. Auditors do not tend to examine small cash payments due to their numerical immateriality, but these funds commonly are used to disburse bribes.
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Figure 6-7 1 out of 4 Businesspeople Admit to Having Paid a Bribe.20

  • Travel and entertainment expenses. Many bribes involve the provision of extravagant vacations, gambling, and entertainment, rather than cash.
  • Sales representatives whose promotional expenses are suspiciously large or who seem to close sales more rapidly than their peers do.
  • Sales and purchasing agents who maintain lifestyles that appear to exceed their incomes.
  • Tip hotlines. To prevent against international bribes, these hotlines should be widely publicized and be reviewed by investigators who have multilingual capabilities.

Whistleblower Protections

The Foreign Corrupt Practices Act technically is classified as a securities law. As a result, individuals who disclose violations of this law are entitled to the same benefits and protections that are afforded to other whistleblowers under the Dodd–Frank Act.21

KICKBACKS, COLLUSION, AND RELATED ARRANGEMENTS

A kickback is a form of bribe in which two or more people share ill-gotten gains from conspiring against another person or entity. For example, assume that two government contractors conspire to rig their bids on a government project to ensure that the government pays an excessively high price. If the winning bidder remits a cut of the windfall to the fellow bidder for its cooperation, the payment is a kickback.

Kickbacks often closely resemble legitimate forms of accountant remuneration, such as commissions, referral fees, contingency fees, and in-kind benefits. The propriety of each of these kinds of payments will now be examined.

Commissions

The Code of Conduct's Commissions and Referral Fee Rule also establishes guidelines that govern commissions paid to an accountant for recommending others' products and services to a client or for recommending a client's products and services to others.

Generally, an accountant may promote goods and services supplied by clients or third-party vendors as long as the accountant's commission is disclosed.22

Notwithstanding this, due to independence concerns, CPAs who perform audits or similar engagements may never receive a commission for promoting goods and services to their clients or on behalf of their client.23

Referral Fees

Clients generally respect their accountants' advice and sometimes rely on them to recommend other financial professionals, such as attorneys and insurance brokers. When a client makes such a request, an accountant has an ethical duty to recommend the most suitable advisor, without favoring friends or close business associates.

In some circumstances, clients might ask their current CPA to recommend another CPA, such as one who has specialized skills or is located in another city. To foster impartiality, the Code of Conduct's Commissions and Referral Fee Rule24 requires CPAs to disclose to clients referral fees that they receive for recommending another CPA. Correspondingly, when a CPA pays a referral fee to be introduced to a client, this fact likewise must be disclosed to the prospective client.25 Moreover, some states have enacted even stricter rules than the Code of Conduct about giving or receiving payments for client referrals. California, for instance, bans CPA referral fees altogether. According to California law, “a person engaged in the practice of public accountancy shall not: (1) pay a fee or commission to obtain a client or (2) accept a fee or commission for referring a client to…a third party.”26

Contingent Fees

Aligning Incentives

In a contingent fee arrangement, professionals are compensated for their efforts only if they achieve a successful outcome for their clients. In some situations, a contingent fee is purely variable, such as when an accountant charges a fee equal to “6% of the costs saving achieved” from implementing a new information system. In other cases, contingency arrangements may provide for a success, or all or nothing, fee. This might arise if, say, an accountant collects an $8,000 fee if a court approves a bankruptcy filing, but otherwise collects nothing.

By offering “no recovery, no fee” arrangements, personal injury lawyers for decades have enabled individuals of modest means to pursue meritorious claims. Furthermore, contingent fee arrangements are beneficial because they substantially align professionals' incentives with their clients' goals. If a professional person, such as a lawyer, provides tenacious representation, both the lawyer and the client prosper. However, if the lawyer slacks off, both end up penniless.

Advocates of contingent fees also point out that they serve a useful purpose in filtering out untenable claims. As an example, an unscrupulous accountant who charges a straight hourly fee might be tempted to pursue a client's mediocre claim for a property tax refund because the accountant will get paid, regardless of whether the client prevails. In contrast, if an accountant's fee equals a percentage of a client's winnings, the accountant will reject feeble client claims, sparing everyone unproductive expenditures of time and money.

Contingent Fee Arrangements versus Kickbacks

Because the win-win nature of contingent fees harmonizes an accountant's interests with a client's interests, clients generally look upon contingent fees arrangements favorably.

The Code of Conduct and the IRS, however, recognize that this close accountant–client bond occasionally may resemble a kickback. Imagine the consequences if an accountant were to set the fee for performing an audit to equal 10% of the amount that a bank agrees to lend the client in reliance on the audited statements. In such a circumstance, the auditor might be tempted to collude with the client to rig the financial statements, to the detriment of the bank. As a result, to promote objectivity and the public interest, the Code of Conduct's Contingent Fees Rule bans contingent fees in three situations.27

First, an accountant may not charge a contingent fee in connection with an audit, a review, or similar engagements in which a significant public interest exists.

Second, tax return preparers and advisors should not be biased by financial temptations that might entice them to skew tax return positions in favor of their clients. Consequently, accountants generally are prohibited from charging contingent fees for preparing original tax returns, amended tax returns, or claims for tax refunds.28

Third, when serving as a testifying expert witness, an accountant is not allowed to have a financial stake in the outcome of the court proceeding.

Notwithstanding the prohibitions listed, contingent fees are allowed in situations in which a court or other public authority fixes an accountant's fees. Also, contingent fees are allowed in tax matters if the accountant's fee depends on a decision reached by a court or government agency, such as the IRS.

Gifts and Entertainment

Since childhood, few things make us smile more than birthday presents, holiday gifts, and other assorted freebies. Unfortunately, the Code of Conduct, in Scrooge-like fashion, requires accountants to be circumspect both in accepting gifts and entertainment and in giving them to clients. According to the Code of Conduct's Integrity and Objectivity Rule, objectivity and independence of thought are jeopardized when accountants offer or receive gifts and entertainment, unless their conduct is reasonable under the circumstances.29

A gift usually is appropriate only if it is of modest value and presented in association with a special occasion. Free entertainment usually is permitted only if it is connected to a substantial business event or activity immediately before, during, or after the entertainment. Moreover, it is never appropriate to accept or provide gifts and entertainment if an accountant knows, or should know, that an action violates a client's policies, the accounting firm's policies, or the law.

INSIDER TRADING

As previously discussed, Scott London, a KPMG regional head audit partner, resigned in shame after admitting in 2013 that he had been tipping off an outside investor about two of his firm's publicly traded clients. After discovering this illegal insider trading activity, the FBI conducted a sting operation in which it videotaped Mr. London discussing his actions.

This “rogue partner,” as KPMG characterized him, effectively had stolen his clients' valuable data. KPMG had to resign its role as auditor, which cost it millions of dollars in lost fee revenues and incalculable harm to its reputation.

You might have guessed that information pirate London received extravagant treasures as bounty for risking his career, his reputation, and his freedom. However, in return for sharing insider tips, London merely received rock concert tickets and cash worth less than one month's pay. Now, having confessed to this crime, London has lost his CPA license and depleted his personal wealth in litigation.

The Ethics of Insider Trading

Accountants use the word fair frequently. The purchase cost of real estate should be allocated between the building and the land based on their relative fair market values. Dealings between related parties should be transacted at fair prices, and many assets, from marketable securities to goodwill, must be written down at year-end to fair value.

Many accountants broadly define fair market value as the price reached between a willing seller and a willing buyer. Some question whether a transaction is truly fair, though, if one party has special information that provides a bargaining advantage.

As early as 70 BC, ancient Roman philosopher Cicero pondered whether a merchant bringing grain to a city with starving residents had a moral duty to disclose the imminent arrival of other grain merchants or whether he could simply continue to charge premium prices to these desperately hungry buyers. Centuries later, at least one influential Catholic theologian, Saint Thomas Aquinas, concluded that a “seller need not give the buyer this information” because, by selling “at the price actually offered him, [he] does not…act contrary to justice through not stating what is going to happen.”30

A similar dilemma arises in modern times. When a corporate executive learns confidential company information, this employee has a clear ethical responsibility to not use or exploit the information in a manner that harms the company. However, consider the more perplexing question: Is it ethical for corporate employees to use nonpublic information to enrich themselves as long as their employer is not harmed?

In evaluating the ethical issues associated with insider trading, it is important to identify the various stakeholders in society that are affected and the nature of the harm, if any, that each sustains.

The Legal Issues

In the case of securities trades, courts have held that an insider may not use confidential information to trade stock and other securities for personal advantage. For a securities trade to be illegal, two key elements must be present.

First, a person must be an insider. Company directors, officers, and other employees with access to confidential financial information are considered to be insiders. Auditors, lawyers, and outside consultants also are labeled temporary insiders regarding confidential information that they learn during the course of providing their services. In addition, stockholders who own at least 10% of a company's stock are considered to be insiders because they are presumed to have access to superior information.

Second, a person must have made a securities trade based on material, nonpublic information. Thus, if an investor has superior information that is derived from publicly available sources, the investor is not precluded from using this information to negotiate favorable stock trades.

To prevent clever schemes, insider trading rules apply when an insider with significant nonpublic information tips off another person who in turn knowingly trades on this secret information. In this situation, both the tipper and the tippee are guilty of insider trading.

Insider trading is a serious offense. When insider trading is discovered, a person found guilty can be forced to relinquish, or disgorge, all ill-gotten gains. Criminal sanctions, including imprisonment, also may be imposed.

EXERCISES

Bribery

  1. Yelp's Code of Business Conduct and Ethics states that employees should not “solicit contributions for any charity or political candidate from any person or entity that does business or seeks to do business with us.” Why is this prohibited?
  2. Your company is bidding against another company to sell multi-billion-dollar industrial equipment to the country of Brazil. The other bidder is a state-owned enterprise that is owned by a country run by a ruthless dictator. This dictator regularly mutilates and tortures citizens who disagree with his policies. This dictator's economy is struggling, and the dictator really needs the cash flow from this proposed sale to prop up his economy.
    1. Would it be ethical for your company to bribe Brazilian officials if, by doing so, you help topple this dictator from power?
    2. Would it be ethical for your company to bribe Brazilian officials if you have learned that this competing state-owned company has offered bribes to these officials?
  3. Prior to its demise, Countrywide Mortgage was one of the largest mortgage originators and loan servicers in the United States. Its top executive, Angelo Mozilo, offered mortgage loans to key government officials and members of Congress at rates that were lower than the rates charged on identical loans to the general public. These loans were called “Friends of Angelo” loans. Was this ethical? Was this a crime?
  4. Your company wants to close a major sale to the government of Ireland. A key Irish official involved in the purchasing process has told you that he would “look very favorably” upon your company if it makes a donation to a charity that provides psychological counseling to abused children.
    1. Would it be ethical to make a large donation to that charity?
    2. Would it affect your decision if you discovered that this key official also serves as a well-paid member of the charity's Board of Directors?
    3. Would it affect your decision if this key official also serves as an unpaid member of the charity's Board of Directors?
  5. You and your father run a small pottery business that exports flower pots and planters to Asia. Your company's sales were only $3 million this year, and your profits were less than $100,000. You try to behave ethically, but the Head of Purchasing for your biggest product distributor just told that she wants you to “match” the bribe that your largest competitor just offered her. You fear that, if you do not offer a similar bribe, you will lose this customer's business.
    1. Are small export companies such as yours exempted from the provisions of the Foreign Corrupt Practices Act?
    2. If you do agree to the bribe, will you have violated the Foreign Corrupt Practices Act?
  6. You work in the accounting department of a defense contractor. It manufactures guns and munitions. You have learned that the CFO of the company, after sending Requests for Proposals to prospective suppliers, has been “strongly suggesting” that these suppliers make payments to various third parties. The CFO does not own stock in the company, but does own stock options granted as part of his compensation plan.

    In response to the CFO's suggestions, a prospective supplier of boxes and shipping materials to your company has made payments to various parties listed below. In which of these cases should the payments be considered to be bribes?

    1. Payments to a foreign elected official
    2. Payments to a U.S. elected official who opposes stricter gun control laws
    3. Payments to a U.S. elected official who supports stricter gun control laws
    4. Contributions to a nonprofit political organization that lobbies in support of a stronger military
    5. Contributions to a nonprofit charitable organization that provides aid to military veterans who were wounded in the line of duty
    6. Contributions to a nonprofit charitable organization that lobbies in support of less-restrictive immigration laws
    7. Who is considered to be making the bribe? The prospective supplier? The CFO?
  7. The purchasing representative for your company has a daughter who participates in a local Girl Scout troop. Determine whether each of the following are appropriate:
    1. The purchasing representative asks suppliers if they would like to buy cookies from her daughter
    2. The purchasing representative insists that suppliers donate to the national Girl Scout organization
    3. The purchasing representative insists that suppliers donate to her daughter's local Girl Scout troop, which in turn spends this money to send its members on camping trips and a trip to Washington, DC.
  8. Two applicants have applied for one space in an elite graduate program. Candidate X has the best qualifications, but Candidate Y comes from a wealthy family. The university can reasonably expect Candidate Y's family to make generous donations to the university if Y is admitted to this elite graduate program.
    1. Is it ethical for the university to admit Candidate Y?
    2. Would you consider the donations that likely will be made by Y's family to be a bribe? Would it matter if Y's family explicitly promised to make donations at the time that Y was applying for admission?
    3. Would it affect your decision if the expected donations from Y's family will be spent to enable 30 low-income students to be able to attend this elite program?
    4. How would a consequentialist view the preceding decision? How do you think that Aristotle or philosopher Thomas Rawls would view this decision?
    5. Do any of your answers depend on whether the university is a state-supported university, a nonprofit institution, or a private, for-profit university?
  9. An investment bank based in the United States wishes to be selected by the government of an economically underdeveloped foreign country to issue government-backed bonds to the American investing public. To assist in its marketing efforts, the investment bank recently hired the daughter of a key government official in that country. This new employee speaks the foreign language fluently and has a thorough understanding of her home country's culture and economy.
    1. Was this ethical?
    2. In assessing whether this employment decision was ethical, is it relevant to you whether this new employee was the most qualified candidate available?
    3. Does it matter to you if the key foreign government official had intervened on behalf of her daughter to request that your firm hire her?
  10. After cracking your tooth on a popcorn kernel, you called your dentist's office. After explaining that your pain was excruciating, you were told by the front desk receptionist that you “could get fit in immediately” by giving the receptionist “an extra $50 in cash…discreetly.” Otherwise, the next available appointment would be in one week.
    1. Would it be ethical for you to pay the “extra $50 in cash” if you suspect that the receptionist is going to “pocket” the cash for herself?
    2. Would it be ethical for the receptionist to get you an immediate office visit if you were not required to make any cash payments and she told you that she was going to cancel another patient's routine teeth cleaning to fit you into the dentist's schedule?
    3. Would it be ethical for the dentist's office to charge a $50 “Urgent Appointment Premium,” payable by check to the dental clinic if this was their standard policy?
    4. Would it be ethical for the dentist's office to charge a $50 “Urgent Appointment Premium,” payable by check to the dental clinic if this was not their standard policy, but the receptionist improvised this special fee because she perceived how desperate you were?
    5. Would it be ethical for the dentist's office to charge a $50 “Urgent Appointment Premium,” payable by check to the dental clinic if this was not their standard policy, but the receptionist saw from her computer records that you live in a zip code where “rich” people live and, therefore, would likely be willing to pay the added fee?
  11. A retail store carries goods from two small beverage manufacturers. The owner of the store has asked you to pay a flat $100 “supplemental fee” weekly to be featured prominently by the checkout aisle.
    1. Is this “supplemental fee” ethical?
    2. Would this “supplemental fee” be ethical if the store owner agreed to move your competitor's merchandise to a remote corner in the back of the store, but did not change how your product was displayed?
    3. Would this “supplemental fee” be ethical if the store owner agreed to feature your beverage prominently and discontinued stocking your competitor's merchandise altogether?

    Referral Fees and Kickbacks

  12. An accountant performs bookkeeping services for a trust fund. When the manager of the trust fund decided to change brokerage firms, the accountant recommended that the client shift to a particular stock brokerage. The stock brokerage agreed to give the accountant a one-time fee equal to 1% of the trust fund's securities investments. The accountant disclosed this fee to the client and obtained the client's approval. Did the accountant's actions comply with the Code of Conduct?
  13. Section 5061(a) of California's Business and Professions Code states that “a person engaged in the practice of public accountancy shall not…pay a fee or commission to obtain a client.”

    You are a young CPA who wants to purchase the professional practice of a CPA located in California who is about to retire. Because you do not have much capital, you tentatively have agreed to pay the retiring CPA an amount equal to “20% of the client fee revenues generated over the next two years.” Does this arrangement violate California law?

  14. In the accounting profession, what is the key difference between a referral fee and a commission?

    Gifts

  15. An auditor's husband is recovering from emergency surgery after being severely injured in a car accident. One of the auditor's longstanding clients sent a $180 gift basket of cheese, crackers, and dried fruits to her home. Does she continue to maintain her independence to audit this client?

    Contingent Fees

  16. A CPA recently performed a review of financial statements prepared by an automobile dealership. The dealership customarily submits these statements monthly to the car manufacturer as a condition of renewing its field warehouse financing. The CPA's fee agreement entitles her to 0.25% of the amount of financing that the car manufacturer agrees to provide. Does this fee agreement comply with the Code of Conduct's rules on contingent fees?
  17. Your client is vigorously challenging the IRS's determination of your client's stock cost basis that resulted from its recent stock-for-stock acquisition of another company. Your client's claim is being decided within the IRS internal appeals process, not by a court. The IRS will conclude that either a “carryover basis” or a “market value” basis is appropriate.

    Your client has agreed to pay you $80,000 if the IRS approves of a “market value” basis. Otherwise, you receive nothing.

    1. Is your fee arrangement a contingent fee?
    2. Does it comply with the Code of Conduct's Contingent Fees Rule?
  18. After a client recently died, her family approached you to serve as the executor of an estate. The probate court will set your fee based on the quality of your work and the level of skill required. Is this fee arrangement allowed under the Code of Conduct?

    Insider Trading

  19. Your former employer currently is being sued by its customer, Brozdang, Inc., for selling it defective merchandise. Brozdang is a publicly traded corporation.

    You worked as a staff accountant for your former employer for about one year, but quit a few months ago because you thought that he was a “lyin', cheatin' piece of dirt.” This employer's reputation for being unethical was well known in the industry.

    You expect Brozdang to win its lawsuit and recover enough damages to move its stock price upward. As a result, you bought outstanding shares of the customer's stock in anticipation of it winning its lawsuit.

    Was it legal and ethical for you to make this stock purchase?

  20. During the course of serving on an audit engagement team, you discovered that your client last year recorded the receipt of cash as a sale rather than as a loan. As a result, the company's revenues and profits were overstated. You expect the company to eventually issue a “prior-year accounting restatement” and expect its stock price to fall.

    Buying a put option essentially is a bet that a stock will fall in value. Would it be appropriate for you to buy a put option on this client's stock from an outside option seller before the client's forthcoming accounting restatement is announced publicly?

  21. When you told your former college roommate that you were about to work as a staff auditor on the Engagamatic, Inc. account, your buddy said to you half-jokingly, “Tell me if you learn anything cool there because I am about to sell all my holdings in that company so I can pay for grad school.” Engagamatic, Inc.'s stock trades on the New York Stock Exchange.

    During the course of the audit, you did in fact learn that your client is going to report far higher revenue growth and operating cash flow growth than a consensus of stock analysts predicted. As a result, you're tempted to tell your friend so she will not sell her stock before Engagamatic releases this surprising upside news.

    1. Would it be legal to tell your friend?
    2. Would anyone be hurt if you tell your friend?
    3. Would it be ethical to tell your friend?
  22. Do you think that the presence of insider trading discourages potential investors from participating in the stock market?
  23. A corporation has superior knowledge of its own prospects over all other stock market participants. Is it ethical for a company to repurchase its own shares as treasury stock?
  24. Many high-level executives buy or sell their own company's stock immediately after the company announces quarterly earnings to avoid the appearance that they are trading based on confidential, nonpublic information.

    Is it possible for a company executive to have material, nonpublic information one minute after a company files its quarterly earnings report, called a Form 10Q, with the SEC? What types of material company information are not disclosed in company financial statements?

  25. Should companies be required to issue periodic forecasts of their future sales and earnings? Would this make financial markets “fairer”?
  26. A call option effectively is a bet that a company's stock is going to increase in value by the date specified in the call option agreement. Call options often can be purchased for a small amount and can yield a large profit if a stock rapidly appreciates in value. Do the insider trading rules prohibit the purchase of call options based on material, nonpublic information?
  27. A put option can effectively be viewed as a bet that a stock's price is going to fall. After the September 11, 2001, attack on the World Trade Center, the FBI observed unusual trading activity in put options on certain airline stocks. The investors in these options made large profits from low-probability, short-term bets that airline stock prices would decline precipitously. Substantial evidence suggested that the securities traders made these investments based on their advance knowledge that this terror attack using U.S. airplanes would occur.

    The terrorists were guilty of a horrible act. Were they also guilty of insider trading?

  28. A psychiatrist had a patient who was struggling with the emotional fallout from discord in her marriage. During a consultation with her psychiatrist, she mentioned that her husband, a top executive, was very busy preparing for a major corporate takeover of a target company. Anticipating that the target company's stock price would rise once this news became public, the psychiatrist made a major purchase of the target company's stock. Was the psychiatrist's stock purchase illegal insider trading?

    Comprehensive Problems

  29. The owner of Giuseppi's Italian Restaurant willingly sells its delicious, but expensive, strawberry cheesecake for half-price after 10 p.m. because he will have to throw it away as stale if it remains unsold. Food servers are instructed to offer cheesecake to customers at full price. If they hesitate or complain about being “too full for dessert,” the food servers then are instructed to offer the cheesecake at half-price.
    1. Is it ethical for the food servers to first offer the cheesecake at full price, knowing that the restaurant owner is willing to lower the price to half-off?
    2. Is it ethical for the food server to offer the cheesecake at half-price at 9:30 p.m. to a customer who was unwilling to pay full price?
    3. Is it ethical for the food server to immediately offer the cheesecake at half-price at 10:00 p.m. to her friends who visited the restaurant in part because she had told her friends about the bargain price of the cheesecake?
    4. Assume that her friends visiting the restaurant did not know about cheesecake becoming available at half-price after 10 p.m. When the friends order the cheesecake at full price at 9:45 p.m., the food server tells them to wait 15 minutes, so they can get the cheesecake at half-price. Is her conduct ethical?
  30. In sports gambling, when a superior opponent is clearly favored to defeat a weaker opponent, bettors often add or subtract a “point spread” to equalize a bet. For example, if Team A is favored to beat Team B by 7 points, a bettor can take “Team B Plus Seven” or “Team A Minus Seven.”

    “Point shaving” occurs when a crooked gambler pays a player to deliberately slack off to alter the outcome of a bet involving his team. For instance, if Team A is favored to win by 7 points, a player on Team A might deliberately slack off so that his team still wins, but the margin of victory changes to, say, 6 points rather than 8 points.

    1. Do you consider “point shaving” to be a bribe?
    2. Do you consider “point shaving” to be a form of insider trading?
    3. If a player secretly gets paid to commit “point shaving,” who is better off? Who is worse off?
    4. Do you consider “point shaving” to be unethical?
    5. Should “point shaving” be considered a crime?
    6. Is “point shaving” more likely to occur in professional sports or in collegiate sports? (The Becker Rational Model of cheating might help you in answering this question.)
    7. In what sports do you think that “point shaving” is most likely to occur?

Notes

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