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CUAVConferenceSpring2014 Blacksburg,Virginia EthicsSession PresentedbyJohnS.Aldridge,CPA CourseObjectives • Learn the meaning ofethicsandintegrity ▫ ▫ ▫ ▫ LookatdifferentapproachestoEthicsthroughouthistory TheRoleofRulesinEthics Values Sampleprocessforevaluatingethicalsituations • Lookatthecausesoffraud ▫ Thefraudtriangle ▫ Thefrauddiamond– andthehumanelement– Capability Introduction Current Environment Doestheeconomyplayapartinadheringtohighethical standards? Pressuresbroughtonbyasluggisheconomymay effectyourabilityto________________? BeVigilant Be awareofthepressuresandremainvigilant Ethicaldilemmasfor: • • • • • • Auditors BoardMember Taxpreparers Businessvaluation Consulting Business: o Industry(internalaudit,CFO) o Academia o Government WhatisEthics? • • • • • Somethingwecanjustmakeup? Themoralfinepoints? Compliancewithrulesandregulations? Anechoofpastphilosophies? Knowingrightfromwrong? EthicsDefined EthicsDefined: • Principlesofrightorgoodconduct;asystemofmoral principlesorvalues;ortherulesorstandardsgoverning conductofmembersofaprofession Ethicsdealswithprinciplesthatdrivehumannature TheUtilitarianApproach Conceivedinthe19th century JeremyBenthamandJohnStuartMill Greatestbalanceofgoodoverevil Application • Identifythevariouscoursesofaction • Askwhowillbeaffected • Whatbenefitsorharmswillbederivedfromeach • Choosetheactionthatwillproducethegreatestbenefits andtheleastharm TheRightsApproach • 18th century • ImmanuelKant • Individual’srighttochooseforherselforhimself • Peoplearenotobjectstobemanipulated;itisa violationofhumandignitytousepeopleinways theydonotfreelychoose Application • Wemustask,Doestheactionrespectthemoral rightsofeveryone? TheFairnessorJusticeApproach • AncientGreekphilosopherAristotle • “Equalsshouldbetreatedequallyandunequals unequally” Application • Howfairisanaction? • Doesittreateveryoneinthesameway,ordoesit showfavoritismanddiscrimination? TypesofEthics • Personal • Professional • Organizational PersonalEthics • A theory or system of moral values • Value is a principle, standard or quality considered worthwhile or desirable • Determined by an individual based on their culture and upbringing and experiences • A determination of what is good and bad, right and wrong, moral duty/obligation for that individual Values • “Valuesarethefoundationofourcharacterandof ourconfidence.Apersonwhodoesnotknowwhat hestandsfororwhatheshouldstandfor,will neverenjoytruehappinessandsuccess.” (L.LionelKendrick) • “Nothinggivessomuchdirectiontoaperson’slife asasoundsetofprinciples.” (RalphWaldoEmerson) ValueExamples • • • • • • • • Adventure Affection Competence Country Ecology Ethicalbehavior Excellence Friends • • • • • • • • Family Freedom Religion Reputation Wealth Wisdom Honesty Integrity Values Whatareyourcorevalues? Values(cont.) Top5Valuesformost: 1. Personalcontrolovertheenvironment (the futureisnotlefttofate) 2. Change/Mobility (thismeansprogress, improvement) 3. Timeanditsimportance(achievementofgoals dependsontheproductiveuseoftime) 4. Equality (peopleareimportantasindividuals,for whotheyare,notfromwhichfamilytheycome) 5. Individualism,Independence,andPrivacy (Peoplehaveindividualneeds) ProfessionalEthics • RulesorStandardsthatgoverntheconduct ofapersonormembersofanorganization OrganizationalEthics • Asystemofprinciplesof“rightconduct” ‐ ‐ ‐ ‐ Determinedby: ACodeofConduct ACodeofEthics PoliciesandProcedures Specifictoabusinessentityandapplicabletoall owners,employeesandbusinessassociates What’sthedifferencebetweenethicsand integrity? Ethics Integrity INTEGRITY • Firmadherencetoacodeofespeciallymoraland artisticvalues(e.g.anethicalcode) • Qualityorstateofbeingofsoundmoral uprightness,honestyandsincerity • Anunimpairedcondition;beingcompleteor undivided • Thesoundnessandauthenticityofsomethingor someone Integrityinvolvesthreesteps In his book titled, Integrity, Stephen L. Carter says integrity requires three steps: 1. Discerning what is right and what is wrong (moral reflectiveness) 2. Acting on what you have discerned even at personal costs (steadfast individual) 3. Saying openly that you are acting on your understanding of right from wrong (unashamed individual) Whatareyouwillingtodofor$10 million? Asurveyof2000Americansacrossthecountryshowed thefollowingofwhattheymightpersonallydo: • • • • • • • • • 25%wouldabandontheirchurchorfamily 23%wouldturntoprostitutionforaweek 16%wouldgiveuptheirAmericancitizenship 16%wouldleavetheirspouses 10%wouldwithholdtestimonyandletamurderergofree 7%wouldkillastranger 6%wouldchangetheirrace 4%wouldchangetheirsex 3%wouldputtheirchildrenupforadoption Howdowedecidethe“right”answer? • Whatprocessdoweuse? • Whatcriteriadoweuse? • Whodoweask? UsinganEthicalDecisionMakingModel10Steps ProbingQuestionsforAssessingOptions orChoices • Whatwouldmymothersaywhenshelearnedof mychoice? • CouldIdefendmychoicebeforeanethics committee? • Whatwouldmypersonalandprofessionalpeers say? • WouldIwantthesamechoicemadeformyselfor mychild? • Howdoesmychoicemakemefeel? FraudOverview FraudOverview • FraudDefinition ▫ Intentionalperversionofthetruthinorderto induceanothertopartwithsomethingofvalueorto surrenderalegalright • Fraudinvolves ▫ ▫ ▫ ▫ Deception Intent Confidence Trust FraudOverview(cont.) • TypesofFraud ▫ Againstanorganization Employeeembezzlement Vendorfraud Customerfraud ▫ Fraudonbehalfofanorganization Managementfraud Investmentscams FraudOverview(cont.) VendorFraud • Businessesareoftenthetargetofunscrupulous contractors/vendorsovercharging,overbilling,kick backs,failingtoperformcontractedworkorservice, andotheractions. • Examples ▫ Acarpetcleanerishiredtoworkforabusinessafter hours.Thebusinessisbilledforweeklyservicewhenin realityserviceisrenderedonlymonthly. ▫ Abusinessplacesanorderfor50chairs,butonly45are delivered.Noonenoticesthedeliberateshortageand thebillispaidinfull. FraudOverview(cont.) CustomerFraud • Customerfraudhasemergedasawaragainstcompanies andisadaptedtospecificsituations.Surprisingly,ethics haslittletodowithsometypesofcustomerfraud.Rather, insomecasesthecustomer’smotivationisaneedtoget even.Somefraudstersbelievetheyhaveanobligationto commitfraud;theydoittoretaliateagainstwhatthey perceiveasunethicalactsthatbusinessescommitagainst them. • Abasicexampleofcustomerfraudistheft.Thisincludes outrighttheftofgoods,butcanalsoincludeforgery, counterfeitmoneyanddeceittoobtainmorecashback.An exampleissomeonesayingtheygaveyouafifty‐dollarbill whentheyonlygaveyouatwenty. TheOriginsofFraud TheFraudTriangle Opportunityisgenerallyprovidedthroughweaknessesininternal controls: ▫ Noseparationofduties ▫ Littlesupervisionandreview ▫ Lackofmanagementapproval ▫ Fewsystemcontrols Pressurecanbeimposeddueto: ▫ Personalfinancialproblems ▫ Personalvicessuchasgambling,drugs,extensivedebt,etc. ▫ Unrealisticdeadlinesandperformancegoals Rationalization– justificationforfraudulentactivities: ▫ “IreallyneedthismoneyandI’llputitbackwhenIgetmypaycheck…” ▫ “I’dratherhavethecompanyonmybackthantheIRS…” ▫ “Ijustcan’taffordtolosemyhome,car,everything…” ▫ “Ineedtomakemynumbersforthisquarter…” TheFraudDiamond David Wolfe and Dana Hermanson Incorporates the human element – CAPABILITY “Opportunity opens the doorway to fraud, and incentive (pressure) and rationalization can draw a person toward it; but the person must have the capability to recognize the open doorway as an opportunity and to take advantage of it by walking through, not just once, but time and time again.” Opportunity Pressure Rationalization Capability TheFraudDiamond(cont..) Sixtraitsinthepersonalityofthefraudsterassociatedwith thecapability element: 1. Positioning– Placewithinanorganization 2. IntelligenceandCreativity 3. Ego– mustthinktheywillnotgetcaught 4. Coercion– oftentimesabullyingpersonality 5. Deceit– mustbeabletolieconsistently 6. Stress– theyhavetobeabletohandlestresswell CASESTUDIES • CountyofNoFraudCaseStudy • MedicalSchoolFraudCaseStudy Questions? • Thankyouforyourattentiontoday.Ifyouhave anyfollow‐upquestions,pleasedonothesitateto calloremailme. ▫ (540)345‐0936 ▫ [email protected]