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2014 Professional Ethics & Conduct

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1 2014 Professional Ethics & Conduct
Story about going to circus with kids and guy on a tightrope who was dancing the cha-cha 50 feet in the air. Made me incredibly nervous. After about 2 minutes, he jumped up and did a back flip on the rope, but didn’t land right and fell. He caught himself and was then dangling on the tightrope with his fingers. Everyone in the audience gasped. This isn’t supposed to happen. He did not have a safety net either. This is the kind of mistake you can’t make very often without a catastrophe. {turns out, my wife was talking to a lady who went the day after us. The guy did it during that show too.} The point is that the safety net is only there to prevent the worst situations. The rules are extremely important, but they certainly aren’t the determining factor in our ethics. Ethics is much more than obeying the rules. 2014 Professional Ethics & Conduct

2 Are you a robot? Are you a robot?
THERE IS AN AUDIO CLIP TO GO ALONG WITH THIS Story of Samantha West, the telemarketer who tells people she’s a human, but is actually a robot. Play clip. What feelings does this bring up when you hear the call? Why does this feel strange? It sure beats shouting at a computer repeating your name 3x’s because it can’t understand you. Thing is, it feels wrong at first. A bit empty because it fakes having a human connection. What’s the difference between a human and a robot? A robot can follow all the rules of human conversation. It can respond, help, assist with your needs on a whim. It can do just about anything if it’s black and white. But, many times, human conversation isn’t black and white. What makes us different is the ability to reason. It’s the ability to play and decide in the gray area. The theme for this year is to emphasize the importance that the rules are the baseline. They are there to simply define black and white. Obeying them isn’t necessarily ethics. There are many times when the law and your ethics will conflict. Obeying the rules is important, but ethics goes much further. As CPA’s, people don’t rely on us because we’re computers that live in the black and white. They rely on us for our professional judgment.

3 Levels of Ethical Maturity
Self-Actualization Societal Influence Comparative Authority Exclusive Authority The lowest level of ethical maturity for the individual is authority. In the organizational context “authority” can be seen as compliance with laws regulations rules, policies and procedures. Exclusive Authority – Small children, infants through toddler, rely exclusively on authority to define what is right and wrong. If Mommy or Daddy says something is good, it’s good. If they say it’s bad, it’s bad. Very young children generally accept the legitimacy of parental authority in defining boundaries. Comparative Authority – As children’s approach school age a second source of authority regarding what is right and wrong emerges. It can be captured in the near universal experience of a child saying to a parent, “I want to do X. Mommy or daddy says, “No, you cannot do that.” And the child replies, “Sally gets to do it. Her mommy says it’s okay.” Our near universal response to that has, for generations, been, “Well, I’m not Sally’s mommy daddy”. At this point the youngster has two influences on the definition of what is right, good fair and appropriate - the authority of his/her parents and that of other adults and/or his peers. Societal Influence – As we get older our horizons broaden and our definitions of what is good, right, fair and just broadens with it. Either through direct contact or indirect experience such as movies and television we learn that that not everyone operates from the same assumptions or has the same experiences as we do. Society is much broader and more diverse than our limited social circle. And we discover that the definition of what is right, good, fair and just can be much more complex and diverse than we had earlier believed. Self-Actualization – Finally, there is the concept of self-actualization, where the individual decision-maker has a fully developed ethos and is able to judge what is right, fair good and just based on an inner compass, informed by authority, peers and society but not limited by them.

4 Ethical Issues Will we agree??

5 Ethical Theories Utilitarianism: Promotion of the best long-term interest of everyone should be the moral standard Maximize good over harm Consequences of acts are moral justification Rights and duties have no independent standing Benefits can be defined and measured and added

6 Ethical Theories Deontology:
Consequences are not the only criteria for determining the morality of the action. Act is what matters Emphasizes maxims, rules, principles Morals are based on fundamental principles not upon mere results Kant’s imperative - one should take that action that he/she would wish everyone to take in all circumstances, irrespective of the consequences of the single action

7 Example of Conflict Eight hostages are about to be executed for no significant crime. You are given the opportunity to shoot and kill one of the hostages and the rest will be freed. If you do not take this action all will be killed. What will you do? What would a utilitarian do? What would a deontologist do?



10 Ethical Drift organizations suffer from ethical drift – a gradual, unconscious lowering of moral standards. While businesses compete for profit, the boundaries between right and wrong become blurred and people’s ethical frame of reference shifts. Human biases like being unrealistically optimistic about an outcome, believing ourselves to be all-powerful, all-knowing and invincible, and the tendency to justify our own behavior  no matter how morally hollow Sternberg

11 Silent Saboteurs Spectacular scandals account for only about 10% of the business losses attributable to poor ethical behavior. The other 90% accounts for billions of dollars annually across the U.S. and appear in the way we treat each other when we try to protect our own turf, or get ahead at the expense of others, or do the wrong thing because we believe that is what our company wants us to do

12 Silent Saboteurs Scapegoating Abdicating Budget Games Overpromising
Turf-guarding Endless meetings and memos Under delivering Risk aversion Sharp penciling - Frank Navran’s article and ‘Feeding the Hog’ story. Ethical scandals in today's businesses quickly make it to the national spotlight. Almost every newspaper highlights some situation or issue reeking of unethical behavior, questionable business practices, or outright law violations. However, Frank Navran writes in a recent issue of Training and Development magazine that those spectacular scandals account for only about 10% of the business losses attributable to poor ethical behavior. That other 90% accounts for billions of dollars annually across the U.S. and appear in the way we treat each other when we try to protect our own turf, or get ahead at the expense of others, or do the wrong thing because we believe that is what our company wants us to do. Mr. Navran lists these examples of the "silent saboteurs“ Note that this spells out “SABOTEURS” Scapegoating - blaming others for missed commitments, bad decisions or poor results. Abdicating - (withholding information) Allowing the boss to fail by withholding information and not pointing out risks. Budget games - padding the budget in anticipation of cuts, end-of-year spending sprees to match estimates to actuals. Overpromising - to win a customer, gain support for a pet project or avoid a confrontation. Turf-guarding - protecting yourself from losing control or power. Endless meetings and memos - to make sure that you are covered or that you can distance yourself from a bad decision. Under delivering - on commitments because the other person's priorities are not important to you or because you look good by looking better than someone else. Risk aversion - not doing what is needed to succeed because you fear the consequences of failure more than you value the reward of success. Sharp penciling - fudging on reported results because everyone else does it so you have to do it to stay competitive for pay and promotions. Frank Navran, Training and Development Magazine

13 More “Silent Saboteurs”
I’ve Got a Secret Credit Taking Lack of Recognition Attention to Detail Let People Know Nursing a Grievance Smoke, but No Fire Emergency, or Just Poor Planning Robin Hood Pushing the Limits I've got a secret - Not keeping others informed of the situation. This can happen at all levels and in all directions. Credit taking - Taking credit for something that someone else or another group has done. An example of this might be the weekly report. Are group results being reported as individual efforts? Lack of recognition - It is important to let other people or other work groups know that they are doing a good job and that their efforts are appreciated. This could go along with credit taking. Attention to detail - This relates to the little things in our lives and in the business of our customers and suppliers. Let people know - that a FAX has been sent. Follow through on commitments. Let people know that you need more time or that you do not fully understand. Don't let people hang by not doing all of your job. Have you as a supervisor ever missed an employee's badge party? How do you think that employee felt? Nursing a Grievance - Certainly problems and stress occur in our daily work activities. But how do you address them? Do you allow them to linger and cut into your relationships and your productivity or do you try to resolve them? Smoke, but No Fire - There is a vast difference between actions and productivity. Do you know those who make it a point to look busy or talk of all they are doing, yet produce little? Is time wasted in unproductive activities? Are diversions created to mask lack of progress? Emergency, or Just Poor Planning - A sign on a secretary's desk stated, "Lack of Planning on Your Part Does Not Create an Emergency on My Part." Can you identify those who allow a crisis to develop before taking action? The price paid for this habit is loss of trust, support and respect. Robin Hood - Taking from the rich and giving it to the poor is admirable in the movies, but it is still theft. Taking something that belongs to TI, whether it be an item or time, with the thought that TI can afford it is still theft. Actually, theft from TI is theft from anyone who holds stock in the company or anyone who would benefit from TI's success. And in the long term, theft impacts jobs and productivity. Pushing the Limits - I was once told that the minimum must be good enough, otherwise it wouldn't be the minimum. Do you know those who live by that code, who do the absolute minimum to get by? They know what the limits are and are always there. They track their attendance and always hit right at the minimum. They push the supervisor on their work ethic until the supervisor is forced to take action. Frank Navran, Training and Development Magazine

14 Sweat the Small Stuff A recent company shared from their ethics compliance office that the most complaints result from an employee observing another employee’s improper use of the company’s assets. The thoughts are: It’s only a pen Nobody will care Everybody does it It doesn’t belong to anybody Nobody will find out Ethical issues that should concern us the most are the ones we face everyday. FEEDING THE HOG CONCLUSION - The answer is not in trying to make the systems foolproof. We have tried that for years and failed because there will always be someone smart enough to beat any system. The answer lies in not treating our employees like people who can’t think. Take away the reasons for lying, cheating, and stealing (or for feeding the hog). Make the Silent Saboteurs an anachronism and your organization will flourish. Find out what your employees are angry about. Identify which organizational requirements they view as conflicting with their personal values. Stimulate the necessary changes to achieve increased ethical congruence.

15 Wall Street Ethics 52% felt it likely their competitors had engaged in unethical acts. 24% felt it likely their company co-workers had engaged in unethical acts. 24% said they would engage in insider trading to make $10 million if they could get away with it. 28% felt the financial services industry does not put the interests of clients first. 29% believe financial services professionals may need to engage in unethical or illegal activity in order to be successful. Talk about the need for ethics and shows what those on Wall Street think Online survey of 250 financial professionals conducted by Labaton Sucharow, a New York City law firm in USA Today July 16, 2013


17 The Ultimatum Game HAVE VOLUNTEERS TO DEMONSTRATE VERSION 1. Consider having Player 1 as employee and Player 2 as boss. This is done in 3 phases. The Ultimatum game, Dictator game and then the true test of Altruism. Ultimatum Game One of the two people is randomly chosen to make an offer to the other about how to split the money between them. If the other person accepts this offer then they split it on that basis. But, if the other person rejects it, neither of them gets anything. That's it. What you find is that most people make offers of splitting the cash somewhere between 40% and 50%. Generally speaking if an offer is made below about 30% it will be rejected by the other person more often than not. Dictator Game Same as the Ultimatum Game, but now Player 2 doesn’t have a say in how much he/she gets. Research has shown that most people (dictators) will still end up ‘giving’ about 20% of their money to Player 2. This has been used for over 40 years to show that humans are hardwired to be altruistic (and thus violate the foundation of economics, i.e. Homo Economicus doesn’t really exist). Does Altruism Exist? Same as the Dictator Game, but with a small twist. Now Player 1 can either give his/her money to Player 2, keep it all, or could instead take $1 from Player 2. Giving goes down to 0%. In fact, 20% took the $1 from Player 2. Increase Player 2’s money to $10 and now Player 1 takes an average of $5 from Player 2. {research performed by John List in 2006} CONCLUSION: People are not necessarily good or bad. People are people. We like to sense that we are being ethical, but maximizing our personal gain at the same time. We tend to follow rules and then go one or two steps above them to be viewed as ethical. We will give some of our money if the lowest choice is to give none. We will not take Player 2’s money if the lowest choice is to take theirs, but we certainly won’t give Player 2 any of ours. The rules/regulations can be like this. The minimum is not where we want to be viewed, but we don’t mind camping out 1-2 steps above that. That’s not where the tightrope act is though. That’s still pretty close to the safety net.

18 Is it ever OK to lie? If you were interviewing someone for a job and it was brought up that he lied to his current employer about where he was, would it affect your views on his trustworthiness? You were housing Anne Frank and a Nazi came to the door; If a boss gives you a gift you don’t like; telling a child that their drawing is nice or that their story is clever, Santa Claus, Surprise parties or Telling new parents that their baby is the cutest ever

19 “When all else fails, tell the truth.'' 
— Donald T. Regan

20 What time is it? It is that time once again to remind ourselves what it means to be a CPA.

21 North Carolina Accountancy Rules North Carolina State Law
To contact: N.C. State Board of Certified Public Accountant Examiners

22 Hierarchy of Ethical Behavior
Character and Courage –Doing the Right Thing Moral Right and Wrong Personal Integrity Hierarchy of Ethical Behavior N.C. Code of Professional Ethics and Conduct Professional Regulation/ Accounting Standards Legal Regulation

23 The Oath of a CPA I Will Support the Laws And Regulations of the State of North Carolina and the United States. I Will Perform my Professional Duties to the Best of my Ability and Abide by The Rules Of Professional Conduct; and I Will Uphold the Honor And Dignity of the Accounting Profession by Serving with Integrity, Objectivity, and Competence. But, the best way to avoid any complaints or cases is just to uphold the oath we all take.

24 Registered North Carolina CPA’s (approx. 19,500)
Other – Legal – 1% Student - .2% Unemployed – 2% Other other – 4% NC CPAs Residing in NC – approx. 16,000 NC CPAs Residing in other States – approx. 3,500 CPAs Nationwide – Approx. 600,000 Numbers taken from October Activity Review

25 2013 State Board Activity Looks like activity was down, but look at the % of cases that turned into disciplinary orders (35% vs. 23% in 2012). 2013 Total Matters Opened – 249 Results: Cases – 183 Unauthorized Use of CPA Title – 39 Disciplinary Orders - 65

26 Disciplinary Orders 2013 Others – 2 Criminal Conduct, 2 Failure to Disclose, 1 Client Records, 1 Regulatory Referral, 6 Others 2012 Others – 3 Regulatory Referral, 3 Embezzlement, 2 Client Records, 9 Others In the Activity Reviews – there were several people who were just 30 minutes shy of the CPE requirement. One had 1.5 hours of ethics instead of 2 hours. This costs them $1,000 and reapplication after a year. More on this later.

27 2014 Changes NC Rules and Regulations
Active and Inactive status only – there is no longer a retired status Certificate applicants are required to disclose any arrests, charges, convictions, PFJs, continuations, or nolo contendere pleas to any criminal offense. Previously, this was only done at the Exam Application. Reporting to the Board – notify the Board within 30 days of any settlements, investigations or liens; Notification required regardless of any confidentiality clause in the settlement For example: DUI with supervised or unsupervised probation Background checks on new applicants revealed that approximately 14% did not disclose all criminal activity Per Bob and David, there has been an increase in the number of applicants with charges, arrests Firms need to ensure that new hires understand and adhere to rules for disclosing activity 21 NCAC 08N .0208c – More on the Settlements/Investigations/Liens later.

28 CPE – Professional Ethics
Annual ethics course – 2 hour group study or self study; NEW: The ethics course must be presented by an approved NASBA sponsor The course must provide you with a certificate of completion. Any ethics hours in excess of 2 hours can be carried over, but cannot be used for the annual ethics requirement in succeeding years.

29 So this happened… Found this in just a general search on CPA ethics. Forwarded to Bob Brooks more as a joke. He then contacted the California State Board notifying them of this and they proceeded to look into it. Turns out, it was posted in 2002. Sometimes being unethical is blatant, like in the Craigslist ad. And, sometimes it’s not. Many times, it can be difficult to put your finger on whether or not something is wrong. Your gut may be telling you something, but there’s just an element missing. Let’s take a look at an example of someone that is obeying all the rules, but just doesn’t quite stack up (next slide – Are you a robot?).


31 NEW: Qualifications of CPE Sponsors
The Board does not register sponsors of CPE courses. The Board does not register CPE courses. CPE sponsors in good standing with NASBA shall be in compliance with CPE requirements.

32 Qualifications of CPE Sponsors
CPE that is not a NASBA sponsor must: Have an individual that did not prepare the course review the course; Provide documentation that states: The general content of the course and skill level taught, Any prerequisites or preparation required, The level of the course (basic, intermediate, etc.), The teaching methods used, The amount of recommended CPE credit, and The date the course is offered. How is the Board going to enforce this? Will it be through the normal CPE audit?

33 Time for an obvious question
Taken from the October Activity Review: Is CPE important? You’re likely to get mixed responses. Is CPE important?

34 Is CPE Important? Frequent Answers
An integral part of professional development Does little to improve professional competency Too expensive Doesn’t apply to my job Not enough time to meet the requirement each year The requirements are too confusing We know the reasons it might not be the best part of our jobs, but WHY is it a requirement?

35 CPE Requirements 40 hours each calendar year
Up to 20 hours of CPE can be carried over Up to 10 hours for publications and 20 hours for teaching; Prorated based on date of approval of application (30, 20, or 10 hours) A course must increase your professional competency You must maintain records substantiating CPE credits for five years (includes current year) No CPE requirement for inactive You must have a certificate of completion for each course NCACPA keeps a record of all CPE that you participate in through them Records must be kept for 5 years Expect an increase in the number of CPE audits – approx. 10% increase Do not Round Hours CPE fabricated by the CPE Compliance officer of the PCAOB in Charlotte……need to refresh details for discussion purposes

36 Do you take CPE seriously?
Reading the paper Texting Checking Facebook Shopping online Playing games Preparing a tax return Reviewing workpapers Knitting Taking online CPE during live class Especially a problem with webcasts Story about Cal in Jonathan’s class sitting to a guy on FB. Cal eventually says something to him. Guy does not take kindly to this, ends up standing up and getting in Cal’s face. Jonathan had no idea this was going on.

37 CPEasy? 184 licensees admitted they completed some of their calendar year CPE between 1/1/13 and 6/30/13. What’s the fate of these 184? In accordance with 21 NCAC 08G .0406, each was issued a Letter of Warning from the Board. A LoW is not a discipline, but just a warning that if they fail to complete the CPE requirement by the end of a calendar year within the next 5 calendar years, the licensee will forfeit his/her certificate. This happened to 5 licensees this year in 2013. If you receive a Letter of Warning, you’ll automatically be chosen for audit the next 2 years.

38 CPEasy? 3-5% of the 1,000-1,200 licensees audited are unable to provide certificates of completion. How long are CPA’s required to maintain their CPE records for purposes of a CPE audit? In accordance with 21 NCAC 08G .0401(i), it is the CPA’s responsibility to maintain records substantiating the CPE credits claimed for the current year and for each of the four calendar years prior to the current year. Those 3-5% (about CPA’s) sign a Consent Order in which the licensee usually forfeits his or her certificate for one year and is assessed a $1,000 civil penalty. Each licensee may then apply for reissuance of his or her CPA certificate, and as part of the application: must complete a specific number of CPE hours, obtain certificates of moral character from 3 CPA’s complete an accountancy law course With the 184 that didn’t meet their CPE and the 50 or so from those audited who can’t prove it, that’s well over 200 each year that have a hard time with the CPE requirement.

39 08N - Professional Ethics & Conduct
Rules For All CPAs (Section 200) Rules For All CPAs Using the CPA Title (Section 300) Rules for All CPAS Performing Attest and Assurance Services (Section 400)

40 Rules for All CPAs (Section 200)
Integrity Deceptive Conduct Prohibited Discreditable Conduct Prohibited Discipline by Federal/State Authorities-30 days Cooperation with Board Inquiry - 21 days to respond Confidentiality Violation of tax laws Reporting Convictions and Judgments Accounting Principles Responsibilities in Tax Practice Competence Outsourcing to third parties IFRS Discipline by Federal/State Authorities – have 30 days to notify the board in writing Cooperation – you have 21 days to respond to a board inquiry Increase in the number of people failing to disclose charges, convictions, etc on license renewal and applications

41 North Carolina Code - Integrity
The reliance of the public and the business community on sound financial reporting and advice on business affairs imposes on the accounting profession an obligation to maintain high standards of technical competence, morality, and integrity. To this end, a CPA shall at all times maintain independence of thought and action, hold the affairs of clients in strict confidence, strive continuously to improve professional skills, observe generally accepted accounting principles and standards, promote sound and informative financial reporting, uphold the dignity and honor of the accounting profession, and maintain high standards of personal conduct. I think we can delete this slide since it is the same as previous years and they have heard it many times. We can just mention it from the other slides that list items related to reputation. MGC Without integrity, your technical competence means nothing. In fact, it’s actually quite dangerous. We’re now going to spend some time talking about the “personal conduct” part of the NC Code.

42 Discreditable Conduct Prohibited
A CPA shall not engage in conduct discreditable to the accounting profession: Acts that reflect adversely on the CPA’s honesty, integrity, trustworthiness, or good moral character Stating or implying an ability to improperly influence a governmental agency or official Failing to comply with any order issued by the Board; or Failing to fulfill the terms of a peer review engagement contract

43 Deceptive Conduct Prohibited
A CPA shall not engage in deceptive conduct. Deception includes fraud or misrepresentation and representations or omissions which a CPA either knows or should know have a capacity or tendency to deceive. Deceptive conduct is prohibited whether or not anyone has been actually deceived. Embellishment = Deception There are plenty of opportunities to do things no one will ever know about.

44 Reporting Convictions, Judgments & Disciplinary Actions
Criminal Actions - A CPA shall notify the Board within 30 days of any conviction or finding of guilt of, pleading of nolo contendere, or receiving a prayer for judgment continued to any criminal offense. Civil Actions - A CPA shall notify the Board within 30 days of any judgment or settlement in a civil suit, bankruptcy action, administrative proceeding, or binding arbitration, the basis of which is grounded upon an allegation of professional negligence, gross negligence, dishonesty, fraud, misrepresentation, incompetence, or violation of any federal or state tax law and which was brought against either the CPA or a North Carolina office of a CPA firm of which the CPA was a managing partner.

45 Reporting Convictions, Judgments & Disciplinary Actions
Settlements - Notify within 30 days of any settlement in lieu of a civil suit or criminal charge grounded upon an allegation of professional negligence; gross negligence; dishonesty; fraud; misrepresentation; incompetence; or violation of any federal, state, or local law. Notification is required regardless of any confidentiality clause in the settlement. Investigations - Notify within 30 days of any inquiry or investigation by the IRS or any state DOR criminal investigation divisions pertaining to any personal or business tax matters. Liens - Notify within 30 days of the filing of any liens by the IRS or any state DOR regarding the failure to pay or apparent failure to pay for any amounts due any tax matters. Changes are in red.

46 Advertising vs. Networking
Do you include CPA after your name on any of these or others? Be proud to put CPA after your name – you are not prohibited from indicating you are a CPA on any of these sites However, if you are “advertising” your services or your firm then you must include your license number

47 Volunteer Opportunities
David is a CPA and the Controller for a retail company. He and his family are very involved in local church activities and he was recently asked to be chair of the finance committee. He thought this would be a good way to serve the church and agreed to take the position. The minister had been at the church for 12 years and was highly respected member of the community. The finance committee worked closely with the church bookkeeper, a part-time position held by a long-time member of the congregation and a close friend of the minister. She prepared a monthly report of collections and expenses for the finance committee and everything seemed to run smoothly. Three months after accepting the chair position Anne, the church secretary asked for a private meeting with David. She reluctantly began her story of how she believed the minister was embezzling church funds with the assistance of the church bookkeeper. Does it matter if David prints the Balance Sheet and Income Statement? Exposure Draft related to Compilations, FS preparation, etc. Comment period ends May 2014 with anticipated effective date periods ending on or after

48 Anne’s husband was head usher and although not required, he often counted the collections before locking them in the church safe On Monday the book-keeper would count the collections, report totals to the minister and one of them would take the deposit to the bank. The past two Monday’s the bookkeeper was ill so the minister asked Mary to take the deposit to the bank. She noticed the amount was less than her husband told her was collected. She initially thought her husband made a mistake, but then got curious and looked at past deposits. Most were less than what her husband counted.

49 Serving on a Board of Directors
What are the duties? Are the Duties Heightened for CPAs? Typical Claims Brought against Board Members What are the Risks? How Can the Risks be Mitigated? What are the Key Steps to Consider before Accepting? From the January 2014 JOA - This one is a big deal and could be part of the what we just talked about with bookkeeping, little league, etc.

50 2013 National Business Ethics Survey
ETHICS TODAY 2013 National Business Ethics Survey KPMG Integrity Survey 2013

51 Observed Misconduct is in Decline
Observed misconduct continues to decline (for the 3rd survey in a row), now at a historic low. Optimistically, we may be witnessing the emergence of a new workplace norm in which workers are predisposed to adhere to high standards of conduct and honor the rules. Ethics Resource Center 2013

52 Ethics Culture Has Strengthened
Culture is another way of referring to “the way things are done around here” Ethics Resource Center 2013

53 Misconduct Declines as Ethics Culture Improves
Ethics Resource Center 2013

54 Who Commits Misconduct?
In Strong Ethics Cultures, Vast Majority of Misconduct Done by Individual Employees Ethics Resource Center 2013

55 Tone at the Top is Bottoming Out – Who Commits Misconduct
Lines up with the 2012 ACFE Report The data reveal that managers are responsible for a worrisome share of workplace misconduct, and senior leaders are more likely than lower-level managers to break rules. In sum, the very people that are supposed to act as role models or enforce discipline are often guilty of bad behavior. Story about PCAOB Ethics Officer who had CPE audited and falsified records to pass audit. Eventually fessed up. Story about IIA Treasurer, Robin Howard, in Prince William Sound Chapter stole $30,000 by sending bank statements to his house even after his term ended. Ethics Resource Center 2013

56 Moving Up the Ranks You are a CPA and have been with a mid-size company for 7 years and moved up the ranks now supervising 12 employees. Your company has just announced a merger with a larger company. Some layoffs in your department are inevitable. Your supervisor Mary, asks you to rank your 12 employees and turn in the list in a week. Mary and her husband are close family friends and her husband is your regular Saturday golf partner. After wrestling with the list all week by using performance metrics, former evaluations, observation and input from peers and clients, you turn the list in to Mary. After looking at the list, Mary says it looks good, but to switch #3 (Corey) and #12 (John). Mary hired John, 2 years ago. He works closely with both you and Mary. In your department his work is sub-standard and he struggles with the responsibilities and has an attitude problem with other employees. You are perplexed by Mary’s suggestion. As you are leaving Mary’s office her administrative assistant follows you out and says, “I overheard your conversation with Mary and I want you to know the reason for her suggestion. Mary and John have been having an affair since he was hired. I overhear their conversations and he travels with her to business meetings that he has no reason to attend. I know, I do the expense reports for both of them.” What do you do? Effectively, Pat has made it clear that the top 5 won’t get laid off. If you make the change, someone deserving will lose their job. If you don’t make the change, you risk losing your job and having the switch happen either way. Do this same case, but from the supervisor’s perspective.

57 The Most Common Company-wide Misconduct
Offering something of value (e.g., cash, gifts, entertainment) to customers/clients 24% Health/safety violations 22% Offering something of value to public officials 20% Violating employee benefits, wage, or overtime rules 20% Violating Internet policies 20%

58 KPMG Integrity Survey 2013  73% of employees reported that they had observed misconduct within their organizations in the previous 12 months More than half of employees reported that what they observed could potentially cause a significant loss of public trust if discovered

59 KPMG Integrity Survey 2013 Nearly half of employees were uncertain that they would be protected from retaliation if they reported concerns to management more than half suggested a lack of confidence that they would be satisfied with the outcome Ethics and compliance programs continue to have a favorable impact on employee perceptions and behaviors

60 Root Causes of Misconduct
64% Feel pressure to do “whatever it takes” to meet business targets 60% Believe the code of conduct is not taken seriously 59% Believe they will be rewarded for results, not the means used to achieve them 59% Fear losing their jobs if they do not meet targets otherwise 59% Lack understanding of the standards hat apply to their jobs 57% Lack resources to get the job done without cutting corners 57% Believe polices or procedures are easy to bypass or override 49% Are seeking to bend the rules or steal for their own personal gain

61 Prevalence of Misconduct KPMG
% Employees 2013 2009 2005 2000 Observed Misconduct in prior 12 months 73% 74% 76% Believed observations could cause “a significant loss of public trust if discovered” 56% 46% 50% 49%

62 Misconduct in Accounting and Finance
Observations 2013 2009 Breaching computer, networks or database controls 34% 22% Entering customer contracts without proper terms, contracts, or approvals 35% 18% Stealing or misappropriating assets 30% 17% Falsifying or manipulating financial reporting information 29% 13%

63 Prevalence of Misconduct -Could cause Significant loss of Public Trust – Significant Industry Increases Industry % Indicating Significant Misconduct % Increase from 2009 Electronics, Software & Services 63% 26% Aerospace & Defense 59% 19% Consumer Markets 56% 20% Chemicals & Diversified Industrials 54% Real Estate & Construction 15%

64 Misconduct in Sales and Marketing
Observations 2013 2009 Engaging in false or deceptive sales practice 47% 27% Improperly gathering competitor confidential information 34% 20% Violating contract terms with customers 29% 14% Engaging in anti-competitive practices 32% 12% Submitting false or misleading invoices to customers 30% 9%

65 Propensity to Report Misconduct KPMG
% Employees 2013 2009 2005 2000 Notify Supervisor or another manager 78% 81% 63% Try resolving directly 54% 52% 53% 40% Call hotline 44% 38% 21% Notify someone outside the organization 26% 10% 4% Look the other way or do nothing 23% 6% 5%

66 Reporting & Retaliation
Despite the positive news about declines in observed misconduct and pressure to compromise standards, the results for two other key measures of ethical performance were less encouraging. Both the number of workers who reported the bad conduct they saw and the number who experienced retaliation after they reported showed no improvement in 2013. When asked why they kept quiet about misconduct, 34% of those who declined to report said they feared payback from senior leadership. 30% worried about retaliation from a supervisor, and 24% said their co-workers might react against them. Furthermore, among those who did choose to report, those who experienced retaliation in the past were less likely than those who did not experience retaliation to say they would report misconduct the next time they see it. The willingness to report in the future was 86% for victims of retaliation compared to 95% among those who had not suffered retribution for past reporting. Ethics Resource Center 2013

67 Making the Whistle Louder
People are MUCH more likely to report if they feel the supervisor encourages ethical behavior via positive feedback. Ethics Resource Center 2013

68 Is it Unethical of Fraud? The Shades of Gray
Quadrant I Ethical and Legal Quadrant II Ethical and Illegal Ethical Professional and Financial Decisions Financial Reporting Rules Corporate Decisions Legal Illegal Quadrant IV Unethical and Illegal Quadrant III Unethical and Legal Unethical

69 Unethical + Illegal = Jail

70 Accounts Payable? Steve is in the accounting department at a regional branch of the bank. He opens and books bills from suppliers and sends them accounts payable for payment. Everything under $500 is paid directly with no further authorization needed. Steve’s wife died from cancer last year after an extended illness and he is raising their three children on his own. He is still trying to pay off huge medical bills from his wife’s illness. The bill collectors are getting very aggressive and he doesn’t know how he will make the payments, pay the day care bills and buy groceries. This week he has to pay $400 in past due day care or the children will be expelled. He goes home and decides to print a fake invoice for office supplies under a reasonable sounding supply company name using his PO Box as an address for the $400 and mails it to the bank. He opens it and sends it through for payment as usual and within a week receives $400 payment. He vows to himself that he will never do this again and will pay it back, but next month the same issues happen so he repeats his billing. Will Steve get caught?

71 Accounting Former KPMG Partner Scott London Sentenced to 14 Months for Insider Trading (April, 2014) Provided inside information to Mr. Shaw, jewelry store owner London said, he had been driven by wanting to help out Mr. Shaw, whose jewelry business was struggling.  After receiving payments from Mr. Shaw, he said in that interview, “I’d feel like I just robbed somebody and I’d feel totally guilty.” But “unfortunately those feelings weren’t enough to keep me from doing it.” He called it a “slippery slope.” Pleaded guilty “it wasn’t inadvertent,” the judge said

72 Remember Madoff Madoff is serving a 150-year prison sentence after pleading guilty in 2009 $65 billion Ponzi scheme

73 March, 2014 Verdict on 5 ex-Madoff employees: Guilty of fraud
"These defendants each played an important role in carrying out the charade, propping it up and concealing it from regulators, auditors, taxing authorities, lenders and investors. The scheme these defendants helped perpetrate cost innumerable investors their life savings. Now it likely will cost the defendants their freedom," said Manhattan U.S. Attorney Preet Bharara in a statement. Guilty on charges they aided and profited from the decades-long fraud

74 Not Just the Executives!
GUILTY Daniel Bonventre, 67, Madoff's ex-director of operations; Annette Bongiorno, 65, a former executive assistant who managed the firm's longest-standing clients; JoAnn Crupi, 52, who oversaw the company's bank account; Former Madoff computer programmers Jerome O'Hara, 50, and George Perez, 48.

75 Dodd Frank & Consumer Protection Act
SEC law providing whistleblowers with “monetary rewards”. Information must lead to recovery of $1 million or more. Reward is between 10-30% of monetary sanction. Must be securities fraud against a public company Basically, whistleblowers who provide original information to the SEC, leading to a recovery of $1 million or more in “monetary sanctions” are entitled to collect 10-30% of the total recovery by the SEC. The rule permits anonymous reporting but to get the money the whistleblower must disclose their identity to the SEC. Excluded from the rule are individuals with legal reporting duties, certain government employees, and individuals convicted of crimes in connection with the reported activity. The SEC has stated that their goal is to balance the whistleblower rule with robust internal compliance programs, although some feel it could weaken compliance programs, because there is no requirement stating that the whistleblower must first report it internally. However, the vote in May 2012 strengthened incentives intended to encourage employees to utilize their own company’s internal compliance programs when appropriate to do so. Make a whistleblower eligible for an award if the whistleblower reports internally and the company informs the SEC about the violations. Treat an employee as a whistleblower, under the SEC program, as of the date that employee reports the information internally – as long as the employee provides the same information to the SEC within 120 days. Through this provision, employees are able to report their information internally first while preserving their “place in line” for a possible award from the SEC. Provide that a whistleblower’s voluntary participation in an entity’s internal compliance and reporting systems is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award. Was approved on May 25, 2011 by a 3-2 vote. However, in certain circumstances, compliance and internal audit personnel as well as public accountants could become whistleblowers when: The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors. The whistleblower believes that the entity is engaging in conduct that will impede an investigation. At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information. “Original Information” – information derived from independent knowledge or independent analysis not derived from public documents, reports, hearings, audits, etc. unless the whistleblower was the source.  This does not include information learned through attorney-client privileged communications, representation of a client, performance of an engagement by an independent public accountant, illegal activity or performance of a legal or contractual duty to report or investigate (unless they reported it to the company and the company did not disclose it to the SEC or proceeded in bad faith).   The rule appears to leave it to the whistleblower’s judgment whether the company acted properly when informed of the problem.

76 False Claims Act & The Qui Tam Whistleblower Reward
False Claims Act is intended to encourage people to come forward with information and assist the government in stopping Medicare fraud, defense contractor fraud and other kinds of federal fraud. The qui tam reward for the whistleblower ranges from 15% to 30%, depending on the extent to which the whistleblower and his counsel contribute to the prosecution of the case. In addition, the False Claims Act provides for the recovery of attorney fees and expenses. These two provisions combine to encourage whistleblowers to come forward US has recovered about $22B since 1987 under this law. The Lincoln Law – this act was originated on March 2, 1863! During the Civil War, fraud was running rampant with both the North and the South selling the armies sick horses/mules, bad rifles/ammunition, spoiled rations, etc. So, Congress passed the False Claims Act for federal contractors.

77 Generational Differences in the Workplace
ETHICS, VALUES AND AGE Ethics Resource Center Businesses committed to strong ethics standards are aware of how important it is to create and maintain a strong sense of values and cohesive culture rooted in integrity where organizational values and personal values align. Strong ethics cultures rely, in part, on a clear, shared understanding of “right” and “wrong,” so employees understand their responsibilities and clearly know what it means to “do the right thing.” Generational differences in perspective and in work style can make the difficult task of culture-building even more challenging. When communication goes awry and cues are misread, it is easy for shared values to manifest themselves in different and even contradictory ways Shaped by significant events, societal trends, and the cultures of their organizations, each generation develops its own unique perspective of what constitutes right and wrong behavior on the job.

78 Which one are you?

79 Influences shaping their world view.
Differences in attitudes and traits have resulted in a great deal of variability in many of the measures of workplace ethics. The study found that the youngest workers are significantly more likely than their older colleagues to feel pressure from others to break ethical rules because the pressure "eases as workers spend more time in the workforce and learn ways of coping with their work environment. As a possible solution, companies should concentrate more on issues of ethical culture during the orientation of new employees, which should mitigate their feeling of not knowing much about how to act within the culture of their new workplace.

80 May be a good lead in for the 2013 ERC or even for a discussion on social media or cybercrime.
2013 NBES

81 How Do the Generations Compare on Misconduct?
Overall Traditionalists Boomers Gen X Millennials 13% Felt Pressure 22% 9% 15% 45% Observed Misconduct 36% 44% 49% 65% Reported Misconduct 39% 64% 69% 67% Perceived Retaliation 16% 18% 21% 29%

82 Ends and Means % of workers who agree to look the other way if the company did something questionable Millennials are significantly more likely to let the ends justify the means Most importantly, the report states that younger workers are significantly more willing to ignore the presence of misconduct if they think that behavior will help save jobs. "Willingness to 'let the ends justify the means' seems to have a strong inverse correlation with age," according to the report. A strong ethics and compliance program has a significant role in developing and maintaining an organization's culture. In terms of the generations, Millennials are particularly driven by a strong program to be more proactive in their ethical conduct. Yet a weak ethics and compliance program has an adverse effect on older cohorts. 2013 NBES

83 Recommendations Best way to address challenges of a workplace spanning multiple generations is… Implement effective ethics and compliance program Build strong ethics culture that encourages employees to do right thing Do this in a way that reaches and influences each generation Culture makes a difference for all generations, but for younger workers, culture is the sum of their interactions with other individuals, much of which interaction is with coworkers. Older workers get their cues about culture from the company’s stated values, messages from the top, and their beliefs about the organization as a whole.

84 Case Study John Green is a fourth year CPA in a large firm on an IT consulting engagement at a major power company’s nuclear facility. His assignment was expected to end in one week, but he just received word they would like him to stay an additional two weeks due to a serious unplanned outage at the facility which slowed down the consulting engagement. He is disappointed because he will not be able to attend a class reunion. He posts on Facebook and the Class Reunion website that delays in the outage will prevent him from being back in town to attend the reunion. Is there a problem?

85 Social Networks - CPA’s are doing it, though they probably don’t know why
SocialCPAs 2012 Social Media Survey

86 It’s Not Just Facebook & YouTube
Significant missteps are happening in HR and recruiting: Profiling Third party recruitment practices LinkedIn New connections = leak of confidential information Endorsements = job search Endorsements destroy your reference policy notices continue long after you have left your company Resume fraud and material misrepresentations 2012 NBES-SN

87 Frequency of Social Networking at Work
Page 20 of NBES of Social Networkers (2013) 2012 NBES-SN

88 Training Best Practices
Select the right method (Live, eLearning, blended) Make it continuous Refresher training Burst Training (periodic 5-7 minute reminders) Compliance communication materials Company intranets Redistribute key policies via training program Make it engaging Scenario-based Realistic (contemporary) issues and stories Focus on behaviors not the law Not overly legalistic – make the content accessible 2012 NBES-SN

89 How Can We Use Social Media to Our Advantage?
Companies can learn from social networking employees to get a better picture of what employees do and how they communicate. Engaging social networkers will ultimately help: Enhance the company’s reputation Strengthen employees’ ethical performance Create a closer relationship between company and employees 2012 NBES-SN

90 The Future Ethical/Fraud Issues: What’s Coming
IT Security Cybercrime It feels like we’re at a point where we have to secure our computers so much that they’re almost unusable. Why are we doing this? Is it much ado about nothing?

91 Fraud in Cyberspace White Lodging -- a company that maintains Hilton, Marriott, Sheraton and Westin hotel franchises -- has apparently suffered a data breach that exposed guests' credit and debit card information in 2013 The Fed admitted that hacking collective Anonymous breached one of its internal websites, accessing the personal data of 4,000 bank executives. Mailing addresses, phone numbers, business s and fax numbers were accessed and published by the hackers online. LivingSocial confirmed that its computer systems were hacked, resulting in “unauthorized access.” The company updated its password encryption method after the breach impacted more than 50 million users. Names, addresses, dates of birth, and salted passwords were stolen. Neiman Marcus announced more than 1 million customer cards were compromised in a breach last summer. Michaels Companies Inc, the biggest U.S. arts and crafts retailer, said it is investigating a possible security breach on its payment card network and advised customers to check their financial statements for fraudulent activity.

92 JPMorgan Chase Hacking Affects 76 Million
A cyberattack this summer on JPMorgan Chase compromised the accounts of 76 million households and seven million small businesses Began in June but was not discovered until July Operating overseas, the hackers gained access to the names, addresses, phone numbers and s of JPMorgan account holders. In its regulatory filing on Thursday, JPMorgan said that there was no evidence that account information, including passwords or Social Security numbers, had been taken

93 Home Depot – 56 million card numbers stolen
Home Depot, Sept. 18, says that to evade detection, the criminals involved in the cyber-attack against it used custom-built malware, which has not been used in other attacks. Home Depot estimates it will spend $62 million in for breach-related costs

94 Home Depot Fraud Home Depot fraud has started to trigger fraudulent transactions across financial institutions and, in some cases, draining cash from customer bank accounts, The fraudulent transactions are showing up across the U.S. as criminals use stolen card information to buy prepaid cards, electronics and even groceries, these people said. In some cases, the fraudulent transactions have been tracked to batches of cardholder accounts that are tied to specific ZIP Codes

95 Methods of Attack – Verizon 2012 Study of Data Thefts

96 Time from initial compromising to discovery – Verizon 2012

97 PWC 2013 State of Cybercrime Survey
Leaders do not know who is responsible for their organization’s cybersecurity, nor are security experts effectively communicating on cyberthreats, cyberattacks, and defensive technologies. Leaders underestimate their cyber-adversaries’ capabilities and the strategic financial, reputational, and regulatory risks they pose.

98 PWC 2013 State of Cybercrime Survey
Leaders are unknowingly increasing their digital attack vulnerabilities by adopting social collaboration, expanding the use of mobile devices, moving the storage of information to the cloud, digitizing sensitive information, moving to smart grid technologies, and embracing workforce mobility alternatives—without first considering the impact these technological innovations have on their cybersecurity profiles.

99 HP & Ponemon Institute 2013 Cost of Cyber Crime Study

100 HP & Ponemon Institute 2013 Cost of Cyber Crime Study
Average annualized cost of cybercrime incurred per organization was $11.56 million, with a range of $1.3 million to $58 million. an increase of 26%, or $2.6 million, over the average cost reported in 2012.(3) Organizations experienced an average of 122 successful attacks per week, up from 102 attacks per week in (4) The average time to resolve a cyberattack was 32 days, with an average cost incurred during this period of $1,035,769, or $32,469 per day 55% increase over 2012’s estimated average cost of $591,780 for a 24-day period.(1)

101 HP & Ponemon Institute 2013 Cost of Cyber Crime Study
Most costly cybercrimes are caused by denial-of-service, malicious-insider and web-based attacks, together accounting for more than 55% of all cybercrime costs per organization on an annual basis.(5) Information theft continues to represent the highest external costs, with business disruption a close second.(6) On an annual basis, information loss accounts for 43% of total external costs, down 2 percent from Business disruption or lost productivity accounts for 36% of external costs, an increase of 18% from (1)

102 HP & Ponemon Institute 2013 Cost of Cyber Crime Study
Recovery and detection are the most costly internal activities. For the past year, recovery and detection combined accounted for 49% of the total internal activity cost, with cash outlays and labor representing the majority of these costs. Cybercrime cost varies by company size, but smaller organizations incur a significantly higher per-capita cost than larger organizations.  Organizations in financial services, defense, and energy and utilities experience substantially higher cybercrime costs than those in retail, hospitality and consumer products.

103 Decision Model for Resolving Ethical Issues

104 I-Tunes APP

105 Three Questions Ask yourself when you are faced with an ethical dilemma: Is it legal? Will you be violating any criminal laws, civil laws, or company policies by engaging in this activity? Is it balanced? Is it fair to all parties concerned both in the short-term as well as the long-term? Is it right? You know the difference between right and wrong…how does this decision make you feel about yourself? Are you proud of yourself for making this decision? Would you like others to know you made the decision you did? Kenneth Blanchard and Norman Vincent Peale, authors of The Power of Ethical Management

106 “When you come close to selling out, reconsider”
From I Hope you Dance, Lee Ann Womack

107 “Ethical errors end careers more quickly and more definitively than any other mistake in judgment or accounting” Solomon, 1994

108 People often over-estimate the cost of doing the right thing and under-estimate the cost of not doing the right thing! @Rockness Education Services 2005

109 “To see what is right and not to do it is want of courage
“To see what is right and not to do it is want of courage.” (Confucius)

110 Cal Christian Jonathan Kraftchick
Story about going to circus with kids and guy on a tightrope who was dancing the cha-cha 50 feet in the air. Made me incredibly nervous. After about 2 minutes, he jumped up and did a back flip on the rope, but didn’t land right and fell. He caught himself and was then dangling on the tightrope with his fingers. Everyone in the audience gasped. This isn’t supposed to happen. He did not have a safety net either. This is the kind of mistake you can’t make very often without a catastrophe. {turns out, my wife was talking to a lady who went the day after us. The guy did it during that show too.} The point is that the safety net is only there to prevent the worst situations. The rules are extremely important, but they certainly aren’t the determining factor in our ethics. Ethics is much more than obeying the rules. Cal Christian Jonathan Kraftchick Melissa Critcher Joanne Rockness

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