Lesson 12
Internal Control and
Business Ethnics
Task Team of
FUNDAMENTAL ACCOUNTING
School of Business,Sun Yat-sen University
2
Outline
The Fundamental Principles of Internal Control
Internal Control to Cash
Explain and Record Petty Cash Fund Transactions.
Prepare a Bank Reconciliation
Exploring the Concept of Accounting Ethics
Accounting Ethics and Social Responsibilities
Accounting Ethics and Decision Making
3
Opening Story
The Failure of Firms
and Internal Control
Enron
Worldcom
CAO
4
Opening Story
China Aviation Oil
(Singapore) Corp.,an
overseas arm of China's
main jet-fuel supplier,
revealed the end of 2004
that it has racked up about
$550 million in trading-
related losses,Ranked 29th most
transparent company
5
Today’s organizations are
concerned about:
Risk Management
Governance
Control
Assurance (and Consulting)
6
Internal Control
Internal Check
Internal Control
Internal Control Structure
Internal Control-----Integrated Framework
ERM
7
Internal Control
What is internal control?
It is the organizational plan and all the
related measures that an entity adopts to…
safeguard assets,
encourage adherence to company policies,
promote operational efficiency,and...
ensure accurate and reliable accounting records.
8
Establishing an Effective
System of Internal Control
Characteristics of an effective internal
control system include:
Competent,reliable,and ethical personnel
Assignment of responsibilities
Proper authorization
Separation of duties
9
Separation of Duties
Separation of operations from accounting
Separation of the custody of assets from accounting
Separation of the authorization of transactions
from the custody of related assets
Separation of duties within the accounting function
10
Internal Controls for
e-Commerce
Stolen credit card numbers
Computer virus and Trojan horses
Impersonation of companies
11
Internal Controls for
e-Commerce
What is an encryption?
It is the primary method of achieving
confidentiality in e-commerce.
Plain-text messages are rearranged by some
mathematical process.
The encrypted message cannot be read by
anyone who does not know the process.
12
Internal Controls for
e-Commerce
FirewallThe Internet Corporate Intranet
Network
Computers
13
The Internal Control Integrated
Framework
14
ERM Defined:
,…a process,effected by an entity's board of
directors,management and other personnel,
applied in strategy setting and across the
enterprise,designed to identify potential
events that may affect the entity,and manage
risks to be within its risk appetite,to provide
reasonable assurance regarding the
achievement of entity objectives.”
Source,COSO Enterprise Risk Management – Integrated Framework,2004,COSO.
15
Why ERM Is Important
Underlying principles:
Every entity,whether for-profit
or not,exists to realize value for
its stakeholders.
Value is created,preserved,or eroded by
management decisions in all activities,
from setting strategy to operating the
enterprise day-to-day,
16
Why ERM Is Important
ERM supports value creation by enabling
management to:
Deal effectively with potential future events
that create uncertainty.
Respond in a manner that reduces the
likelihood of downside outcomes and increases
the upside,
17
Enterprise Risk Management
—— Integrated Framework
This COSO ERM framework defines
essential components,suggests a common
language,and provides clear direction and
guidance for enterprise risk management.
18
The ERM Framework
Entity objectives can be viewed in the
context of four categories:
Strategic
Operations
Reporting
Compliance
19
The ERM Framework
ERM considers activities at all levels of the
organization:
Enterprise-level
Division or subsidiary
Business unit processes
20
The ERM Framework
Enterprise risk management
requires an entity to take a portfolio
view of risk.
21
The ERM Framework
Management considers how
individual risks interrelate.
Management develops a portfolio view
from two perspectives:
Business unit level
Entity level
22
The ERM Framework
The eight components of the
framework are interrelated…
23
Fundamental Principles of
Internal Accounting Control
Ensure transactions and activities are
authorized.
Maintain adequate records.
Insure assets.
Separate recordkeeping and custody of
assets.
Establish a separation of duties.
24
Fundamental Principles of
Accounting Internal Control
Apply technological controls.
Perform internal and external audits.
Internal controls will vary based on the
nature and size of the organization.
25
Human Error
Negligence
Fatigue
Misjudgment
Confusion
Human Fraud
Intent to
defeat internal
controls for
personal gain
Limitations of Internal
Accounting Control
26
The costs of internal
controls must not
exceed their benefits.
Limitations of Internal Control
Benefit
s Costs
27
Cash
Is an important asset for every company.
Control of cash on hand and access to it is
critical.
Cash includes:
Currency
Coins
Deposits in bank accounts
Other items acceptable for deposit
28
The Bank Account as a
Control Device
Documents used to control a bank account
include:
signature card
deposit ticket
check
bank statement
bank reconciliation
29
Liquidity
Refers to how easily an asset can be
converted into another asset or used in
paying for services or obligations.
Examples:
Cash- highly liquid
A specialized piece of equipment -not very
liquid.
Inventory Cash
30
The Bank Reconciliation
What are two records of a business‘s cash?
Cash account in the business‘s own general
ledger.
The bank statement which tells the actual
amount of cash the business has in the bank.
31
The Bank Reconciliation
Items recorded by a company not on the
bank statement:
deposit in transit
outstanding checks
32
The Bank Reconciliation
Items on a bank statement and not
recorded by the business:
bank collections
bank fees
interest earned on account
NSF checks
33
The Paths That Two Checks
Take (Good Check)
Maker
writes check
to payee.
Payee
deposits check
in bank.
Payee’s bank
sends check to
maker’s bank.
Maker’s bank
pays the check.
34
The Paths That Two Checks
Take (NFS Check)
Maker‘s bank
balance is not
sufficient to
pay the check.
Payee holds
worthless
check,
Payee‘s bank
decreases payee‘s
balance.
Maker‘s bank
sends the
worthless
check back to
payee‘s bank.
35
The Bank Reconciliation
Example
At the beginning of July,Sahita,Inc,
received the June‘s bank statement.
It indicated the following:
The bank balance was $63,275.
The bank had collected a note receivable
from one of Sahita‘s customers in the
amount of $1,325.
36
The Bank Reconciliation
Example
The bank paid the electric bill of $1,500.
There was a $200 check returned for NSF.
Interest earned on the account was $265.
Bank service charges were $12.
37
The Bank Reconciliation
Example
Sahita‘s books indicates a cash balance
of $66,647.
A deposit of $11,250 was mailed to the
bank on June 30.
Checks issued in June for $8,000 have
not yet been paid by the bank.
38
The Bank Reconciliation Example
Balance per bank,June 30 $63,275
Add deposit in transit 11,250
$74,525
Less outstanding check 8,000
Adjusted bank balance $66,525
39
The Bank Reconciliation Example
Balance per books,June 30 $66,647
Add,Note receivable
collected by the bank 1,325
Interest income 265
$68,237
Less,Payment of electric bill 1,500
NSF check 200
Service charge 12
Adjusted book balance $66,525
40
The Bank Reconciliation Example
Balance per bank
$66,525
Equal amounts
Balance per books
$66,525
41
Record Reconciling
Items
June 30,200x
Cash 1,325
Notes Receivable 1,325
Notes collected by the bank
June 30,200x
Cash 265
Interest Income 265
Interest earned on bank balance
42
Record Reconciling Items
June 30,200x
Utilities Expense 1,500
Cash 1,500
Monthly electricity expense
June 30,200x
Accounts Receivable – NSF 200
Cash 200
NSF check returned by bank
43
Record Reconciling Items
June 30,200x
Bank Service Fees 12
Cash 12
Bank service charges
44
Internal Controls for Cash
Guidelines:
1,Separate handling of cash from
recordkeeping of cash.
2,Deposit cash receipts daily.
3,Make cash disbursements by cheque,
45
Cash Receipts
Over the Counter
The terminal should be positioned so that customers can see
the amount the cashier enters into the cash register.
The cash drawer should open only when the sales clerk
enters an amount on the keypad.
The roll of tape locked inside the machine records each sale
and cash transaction.
Pricing merchandise at ―uneven‖ amounts means that the
clerk has to open the cash drawer.
This requires entering the amount of the sale on the keypad
and so onto the register tape.
46
Cash Receipts
Over the Counter
At the end of the day,the cashier
deposits the cash in the bank.
The tape goes to accounting.
47
Cash Receipts by Mail
All incoming mail should be opened by a
mailroom employee.
This person should compare the check received
with the remittance advice.
Cash receipts should be given to the cashier.
The mailroom employee forwards the remittance
advice to accounting.
Many companies use a lock-box system.
Customers send their checks directly to an address
that is a bank account.
Company personnel do not handle the cash.
48
Cash Short and Over
Assume that the cash register tapes
indicate sales revenue of $25,000.
However,the cash received was $24,980.
What entry would record the day‘s sales?
Cash 24,980
Cash Short and Over 20
Sales Revenue 25,000
Daily cash sales
49
Petty Cash System of Control
Good internal control procedures require
cash disbursements be made by cheque.
The exception:
Small payments required
in most companies for items such as postage,
courier fees,repairs and supplies.
This is an example of the cost-benefit limitation
Petty Cashier
50
Control of Cash Disbursements
All expenditures should be made by cheque,
The only exception is for small payments
from petty cash.
Separate authorization,cheque signing and
recordkeeping duties.
Apply a voucher system.
51
Control Over
Approval of Payments
The accounting department...
combines all of these documents,
checks them for accuracy,and...
forwards this disbursement packet to
designated officers for approval and
payment.
52
Controlling Petty Cash
Payments
On June 15,Sahita Inc,manager decided
to establish a $250 petty cash fund.
What is the entry?
June 15,200x
Petty Cash 250
Cash in Bank 250
To open the petty cash fund
53
Controlling Petty Cash
Payments
Jose is the petty cash custodian responsible
for the fund.
On June 20,he purchased supplies in the
amount of $70.
For each disbursement,he prepares a petty
cash ticket.
At all times the amount of cash in the petty
cash fund plus the petty cash tickets must
equal $250.
54
Controlling Petty Cash
Payments
Jose also spent $20 for delivery charges and
$60 for coffee and other miscellaneous
expenses.
What is the journal entry to record the
replenishment of the fund?
55
Controlling Petty Cash
Payments
June 30,200x
Supplies 70
Delivery Expense 20
Miscellaneous Expense 60
Cash in Bank 150
To replenish the petty cash fund
56
Ethical Values Do Matter!
In making judgment,the Early Kings were perfect,
because they made more principles the starting
point of all their undertaking and the root of
everything that was beneficial,This principle,
however,is something that persons of mediocre
intellect never grasp,Not grasping it,they lack
awareness,and lacking awareness,they pursue
profit,But while they pursue profit,it is absolutely
impossible for them to be certain of attaining it.
--Lv Bu-wei 246BC,
The Annals of Lv Bu-wei,Lu Shi Chun Qiu
57
Ethical Values
Ethical values have been changed immensely in
the last century,
Ethical and moral values provide a foundation to
society on how to function,live,and work within
the society,
Ethical values provide the foundation on which a
civilized society exists,Without the foundation,
civilization collapses.
58
Enron Cartoon
There are two levers to set a man in motion,
fear and self-interest.
——Napoleon Bonaparte
59
Economic Boom and Ethics
The boom of the 1990's --
changing the business
environment,reshaping
corporate leadership,
Financial scandals and out-of-
hand executive compensation --
a lapse of ethics and
unprecedented greed,a disdain
for the rule of law,
The most pressing leadership
issue for today ---ensure that
corporate officers behave in an
ethical manner.
60
Ethical Issues in Accounting
CEO ---- daily share price v.s,long-term corporate
value
Current compensation practices—
overstate earnings to boost pay
short-term behavior
excessive risk-taking
aggressive accounting methods
Legislation ---- tackle the accounting
irregularities issues caused by
unethical executives,
(G.Bush signed into law ―Sarbanes-Oxley Act of 2002‖)
61
Purposes of Ethics
Direct business men and women to abide by a code
of conduct that facilitates,if not encourages,public
confidence in their products and services.
In the accounting field,professional organizations
such as the AICPA,IMA,maintain and enforce a
code of professional conduct for public accountants
They recognize the accounting profession's
responsibility to provide ethical guidelines to its
members.
62
Can One Person Make A
Difference in Business Ethics?
I am only one.
But still I am one.
I cannot do everything,
But still I can do something;
And because I cannot do everything
I will not refuse to do the something that I can do.
---Edward Everett Hale
63
Who Takes the Lead?
At this moment,America‘s highest economic need
is higher ethical standards --- standards enforced
by strict laws and upheld by responsible business
leaders.
George W,Bush,Corporate Responsibility
speech
July 9,2002
64
65
Ethics and Social Responsibility
Ethics
Accepted
standards of
good and
bad
behaviour
Often coincide
with laws
Beliefs that
separate right
from wrong
66
Social Responsibility
Donations to not-for-
profit organizations
Programs to reduce
pollution and better use
natural resources
Programs to improve
worker and consumer
safety
Paid time off for workers
67
Guidelines for Ethical
Decision Making
Identify
Ethical Issues
Use personal
ethics to
recognize ethical
issues.
Analyze
Options
Consider both
the good and bad
consequences
for all affected.
Make Ethical
Decision
Choose the best
option after
weighing all
consequences.
68
Professional Code of
Ethics
Accountants are held to very high standards
of conduct.
There is no compromising.
Would you hire an accountant who is
―almost always‖ honest?
Internal controls rely upon basic honesty
and integrity.
69
Summary
The Fundamental Principles of Internal Control
Internal Check; Internal Control; Internal Control
Structure; Internal Control Integrated Framework; ERM.
The Internal Accounting Control
The Purposes and Principles of Internal Control,
Internal Control to Cash
Record Petty Cash Fund Transactions.
Prepare a Bank Reconciliation,
Ethical values have been changed immensely in the
last century
Ethics are closely related to social responsibility
Ethics influence people‘s decision making
70
Case for Discussion
This connection will direct you to the
complete case
―HOW DO YOU MEASURE SUCCESS?‖
(Click on the title of case)
71
Case for Discussion
This connection will direct you to the
complete case
―Ethics and Enron?‖
http://www.businessethics.ca/enron/
72
Case for Discussion
CCC company is a young business that has grown
rapidly.The company‘s bookkeeper,who was hired two
years ago,left town suddenly after suddenly after the
company?s manager discovered that a great deal of money
had disappeared over the past 18 months.An audit
disclosed that the bookkeeper had written and signed
several cheques made payable to the bookkeeper‘s
sister,and then recorded the cheques as salaries
expense.The sister,who cashed the cheques but had never
worked for the company,left town with the bookkeeper.As
a result,the company incurred an uninsured loss of $
600,000,
73
Evaluate CCC company‘s internal
accounting control appear to have been
ignored in this situation,
Case for Discussion
The End of Lesson 12
Internal Control and
Business Ethnics
Task Team of
FUNDAMENTAL ACCOUNTING
School of Business,Sun Yat-sen University
2
Outline
The Fundamental Principles of Internal Control
Internal Control to Cash
Explain and Record Petty Cash Fund Transactions.
Prepare a Bank Reconciliation
Exploring the Concept of Accounting Ethics
Accounting Ethics and Social Responsibilities
Accounting Ethics and Decision Making
3
Opening Story
The Failure of Firms
and Internal Control
Enron
Worldcom
CAO
4
Opening Story
China Aviation Oil
(Singapore) Corp.,an
overseas arm of China's
main jet-fuel supplier,
revealed the end of 2004
that it has racked up about
$550 million in trading-
related losses,Ranked 29th most
transparent company
5
Today’s organizations are
concerned about:
Risk Management
Governance
Control
Assurance (and Consulting)
6
Internal Control
Internal Check
Internal Control
Internal Control Structure
Internal Control-----Integrated Framework
ERM
7
Internal Control
What is internal control?
It is the organizational plan and all the
related measures that an entity adopts to…
safeguard assets,
encourage adherence to company policies,
promote operational efficiency,and...
ensure accurate and reliable accounting records.
8
Establishing an Effective
System of Internal Control
Characteristics of an effective internal
control system include:
Competent,reliable,and ethical personnel
Assignment of responsibilities
Proper authorization
Separation of duties
9
Separation of Duties
Separation of operations from accounting
Separation of the custody of assets from accounting
Separation of the authorization of transactions
from the custody of related assets
Separation of duties within the accounting function
10
Internal Controls for
e-Commerce
Stolen credit card numbers
Computer virus and Trojan horses
Impersonation of companies
11
Internal Controls for
e-Commerce
What is an encryption?
It is the primary method of achieving
confidentiality in e-commerce.
Plain-text messages are rearranged by some
mathematical process.
The encrypted message cannot be read by
anyone who does not know the process.
12
Internal Controls for
e-Commerce
FirewallThe Internet Corporate Intranet
Network
Computers
13
The Internal Control Integrated
Framework
14
ERM Defined:
,…a process,effected by an entity's board of
directors,management and other personnel,
applied in strategy setting and across the
enterprise,designed to identify potential
events that may affect the entity,and manage
risks to be within its risk appetite,to provide
reasonable assurance regarding the
achievement of entity objectives.”
Source,COSO Enterprise Risk Management – Integrated Framework,2004,COSO.
15
Why ERM Is Important
Underlying principles:
Every entity,whether for-profit
or not,exists to realize value for
its stakeholders.
Value is created,preserved,or eroded by
management decisions in all activities,
from setting strategy to operating the
enterprise day-to-day,
16
Why ERM Is Important
ERM supports value creation by enabling
management to:
Deal effectively with potential future events
that create uncertainty.
Respond in a manner that reduces the
likelihood of downside outcomes and increases
the upside,
17
Enterprise Risk Management
—— Integrated Framework
This COSO ERM framework defines
essential components,suggests a common
language,and provides clear direction and
guidance for enterprise risk management.
18
The ERM Framework
Entity objectives can be viewed in the
context of four categories:
Strategic
Operations
Reporting
Compliance
19
The ERM Framework
ERM considers activities at all levels of the
organization:
Enterprise-level
Division or subsidiary
Business unit processes
20
The ERM Framework
Enterprise risk management
requires an entity to take a portfolio
view of risk.
21
The ERM Framework
Management considers how
individual risks interrelate.
Management develops a portfolio view
from two perspectives:
Business unit level
Entity level
22
The ERM Framework
The eight components of the
framework are interrelated…
23
Fundamental Principles of
Internal Accounting Control
Ensure transactions and activities are
authorized.
Maintain adequate records.
Insure assets.
Separate recordkeeping and custody of
assets.
Establish a separation of duties.
24
Fundamental Principles of
Accounting Internal Control
Apply technological controls.
Perform internal and external audits.
Internal controls will vary based on the
nature and size of the organization.
25
Human Error
Negligence
Fatigue
Misjudgment
Confusion
Human Fraud
Intent to
defeat internal
controls for
personal gain
Limitations of Internal
Accounting Control
26
The costs of internal
controls must not
exceed their benefits.
Limitations of Internal Control
Benefit
s Costs
27
Cash
Is an important asset for every company.
Control of cash on hand and access to it is
critical.
Cash includes:
Currency
Coins
Deposits in bank accounts
Other items acceptable for deposit
28
The Bank Account as a
Control Device
Documents used to control a bank account
include:
signature card
deposit ticket
check
bank statement
bank reconciliation
29
Liquidity
Refers to how easily an asset can be
converted into another asset or used in
paying for services or obligations.
Examples:
Cash- highly liquid
A specialized piece of equipment -not very
liquid.
Inventory Cash
30
The Bank Reconciliation
What are two records of a business‘s cash?
Cash account in the business‘s own general
ledger.
The bank statement which tells the actual
amount of cash the business has in the bank.
31
The Bank Reconciliation
Items recorded by a company not on the
bank statement:
deposit in transit
outstanding checks
32
The Bank Reconciliation
Items on a bank statement and not
recorded by the business:
bank collections
bank fees
interest earned on account
NSF checks
33
The Paths That Two Checks
Take (Good Check)
Maker
writes check
to payee.
Payee
deposits check
in bank.
Payee’s bank
sends check to
maker’s bank.
Maker’s bank
pays the check.
34
The Paths That Two Checks
Take (NFS Check)
Maker‘s bank
balance is not
sufficient to
pay the check.
Payee holds
worthless
check,
Payee‘s bank
decreases payee‘s
balance.
Maker‘s bank
sends the
worthless
check back to
payee‘s bank.
35
The Bank Reconciliation
Example
At the beginning of July,Sahita,Inc,
received the June‘s bank statement.
It indicated the following:
The bank balance was $63,275.
The bank had collected a note receivable
from one of Sahita‘s customers in the
amount of $1,325.
36
The Bank Reconciliation
Example
The bank paid the electric bill of $1,500.
There was a $200 check returned for NSF.
Interest earned on the account was $265.
Bank service charges were $12.
37
The Bank Reconciliation
Example
Sahita‘s books indicates a cash balance
of $66,647.
A deposit of $11,250 was mailed to the
bank on June 30.
Checks issued in June for $8,000 have
not yet been paid by the bank.
38
The Bank Reconciliation Example
Balance per bank,June 30 $63,275
Add deposit in transit 11,250
$74,525
Less outstanding check 8,000
Adjusted bank balance $66,525
39
The Bank Reconciliation Example
Balance per books,June 30 $66,647
Add,Note receivable
collected by the bank 1,325
Interest income 265
$68,237
Less,Payment of electric bill 1,500
NSF check 200
Service charge 12
Adjusted book balance $66,525
40
The Bank Reconciliation Example
Balance per bank
$66,525
Equal amounts
Balance per books
$66,525
41
Record Reconciling
Items
June 30,200x
Cash 1,325
Notes Receivable 1,325
Notes collected by the bank
June 30,200x
Cash 265
Interest Income 265
Interest earned on bank balance
42
Record Reconciling Items
June 30,200x
Utilities Expense 1,500
Cash 1,500
Monthly electricity expense
June 30,200x
Accounts Receivable – NSF 200
Cash 200
NSF check returned by bank
43
Record Reconciling Items
June 30,200x
Bank Service Fees 12
Cash 12
Bank service charges
44
Internal Controls for Cash
Guidelines:
1,Separate handling of cash from
recordkeeping of cash.
2,Deposit cash receipts daily.
3,Make cash disbursements by cheque,
45
Cash Receipts
Over the Counter
The terminal should be positioned so that customers can see
the amount the cashier enters into the cash register.
The cash drawer should open only when the sales clerk
enters an amount on the keypad.
The roll of tape locked inside the machine records each sale
and cash transaction.
Pricing merchandise at ―uneven‖ amounts means that the
clerk has to open the cash drawer.
This requires entering the amount of the sale on the keypad
and so onto the register tape.
46
Cash Receipts
Over the Counter
At the end of the day,the cashier
deposits the cash in the bank.
The tape goes to accounting.
47
Cash Receipts by Mail
All incoming mail should be opened by a
mailroom employee.
This person should compare the check received
with the remittance advice.
Cash receipts should be given to the cashier.
The mailroom employee forwards the remittance
advice to accounting.
Many companies use a lock-box system.
Customers send their checks directly to an address
that is a bank account.
Company personnel do not handle the cash.
48
Cash Short and Over
Assume that the cash register tapes
indicate sales revenue of $25,000.
However,the cash received was $24,980.
What entry would record the day‘s sales?
Cash 24,980
Cash Short and Over 20
Sales Revenue 25,000
Daily cash sales
49
Petty Cash System of Control
Good internal control procedures require
cash disbursements be made by cheque.
The exception:
Small payments required
in most companies for items such as postage,
courier fees,repairs and supplies.
This is an example of the cost-benefit limitation
Petty Cashier
50
Control of Cash Disbursements
All expenditures should be made by cheque,
The only exception is for small payments
from petty cash.
Separate authorization,cheque signing and
recordkeeping duties.
Apply a voucher system.
51
Control Over
Approval of Payments
The accounting department...
combines all of these documents,
checks them for accuracy,and...
forwards this disbursement packet to
designated officers for approval and
payment.
52
Controlling Petty Cash
Payments
On June 15,Sahita Inc,manager decided
to establish a $250 petty cash fund.
What is the entry?
June 15,200x
Petty Cash 250
Cash in Bank 250
To open the petty cash fund
53
Controlling Petty Cash
Payments
Jose is the petty cash custodian responsible
for the fund.
On June 20,he purchased supplies in the
amount of $70.
For each disbursement,he prepares a petty
cash ticket.
At all times the amount of cash in the petty
cash fund plus the petty cash tickets must
equal $250.
54
Controlling Petty Cash
Payments
Jose also spent $20 for delivery charges and
$60 for coffee and other miscellaneous
expenses.
What is the journal entry to record the
replenishment of the fund?
55
Controlling Petty Cash
Payments
June 30,200x
Supplies 70
Delivery Expense 20
Miscellaneous Expense 60
Cash in Bank 150
To replenish the petty cash fund
56
Ethical Values Do Matter!
In making judgment,the Early Kings were perfect,
because they made more principles the starting
point of all their undertaking and the root of
everything that was beneficial,This principle,
however,is something that persons of mediocre
intellect never grasp,Not grasping it,they lack
awareness,and lacking awareness,they pursue
profit,But while they pursue profit,it is absolutely
impossible for them to be certain of attaining it.
--Lv Bu-wei 246BC,
The Annals of Lv Bu-wei,Lu Shi Chun Qiu
57
Ethical Values
Ethical values have been changed immensely in
the last century,
Ethical and moral values provide a foundation to
society on how to function,live,and work within
the society,
Ethical values provide the foundation on which a
civilized society exists,Without the foundation,
civilization collapses.
58
Enron Cartoon
There are two levers to set a man in motion,
fear and self-interest.
——Napoleon Bonaparte
59
Economic Boom and Ethics
The boom of the 1990's --
changing the business
environment,reshaping
corporate leadership,
Financial scandals and out-of-
hand executive compensation --
a lapse of ethics and
unprecedented greed,a disdain
for the rule of law,
The most pressing leadership
issue for today ---ensure that
corporate officers behave in an
ethical manner.
60
Ethical Issues in Accounting
CEO ---- daily share price v.s,long-term corporate
value
Current compensation practices—
overstate earnings to boost pay
short-term behavior
excessive risk-taking
aggressive accounting methods
Legislation ---- tackle the accounting
irregularities issues caused by
unethical executives,
(G.Bush signed into law ―Sarbanes-Oxley Act of 2002‖)
61
Purposes of Ethics
Direct business men and women to abide by a code
of conduct that facilitates,if not encourages,public
confidence in their products and services.
In the accounting field,professional organizations
such as the AICPA,IMA,maintain and enforce a
code of professional conduct for public accountants
They recognize the accounting profession's
responsibility to provide ethical guidelines to its
members.
62
Can One Person Make A
Difference in Business Ethics?
I am only one.
But still I am one.
I cannot do everything,
But still I can do something;
And because I cannot do everything
I will not refuse to do the something that I can do.
---Edward Everett Hale
63
Who Takes the Lead?
At this moment,America‘s highest economic need
is higher ethical standards --- standards enforced
by strict laws and upheld by responsible business
leaders.
George W,Bush,Corporate Responsibility
speech
July 9,2002
64
65
Ethics and Social Responsibility
Ethics
Accepted
standards of
good and
bad
behaviour
Often coincide
with laws
Beliefs that
separate right
from wrong
66
Social Responsibility
Donations to not-for-
profit organizations
Programs to reduce
pollution and better use
natural resources
Programs to improve
worker and consumer
safety
Paid time off for workers
67
Guidelines for Ethical
Decision Making
Identify
Ethical Issues
Use personal
ethics to
recognize ethical
issues.
Analyze
Options
Consider both
the good and bad
consequences
for all affected.
Make Ethical
Decision
Choose the best
option after
weighing all
consequences.
68
Professional Code of
Ethics
Accountants are held to very high standards
of conduct.
There is no compromising.
Would you hire an accountant who is
―almost always‖ honest?
Internal controls rely upon basic honesty
and integrity.
69
Summary
The Fundamental Principles of Internal Control
Internal Check; Internal Control; Internal Control
Structure; Internal Control Integrated Framework; ERM.
The Internal Accounting Control
The Purposes and Principles of Internal Control,
Internal Control to Cash
Record Petty Cash Fund Transactions.
Prepare a Bank Reconciliation,
Ethical values have been changed immensely in the
last century
Ethics are closely related to social responsibility
Ethics influence people‘s decision making
70
Case for Discussion
This connection will direct you to the
complete case
―HOW DO YOU MEASURE SUCCESS?‖
(Click on the title of case)
71
Case for Discussion
This connection will direct you to the
complete case
―Ethics and Enron?‖
http://www.businessethics.ca/enron/
72
Case for Discussion
CCC company is a young business that has grown
rapidly.The company‘s bookkeeper,who was hired two
years ago,left town suddenly after suddenly after the
company?s manager discovered that a great deal of money
had disappeared over the past 18 months.An audit
disclosed that the bookkeeper had written and signed
several cheques made payable to the bookkeeper‘s
sister,and then recorded the cheques as salaries
expense.The sister,who cashed the cheques but had never
worked for the company,left town with the bookkeeper.As
a result,the company incurred an uninsured loss of $
600,000,
73
Evaluate CCC company‘s internal
accounting control appear to have been
ignored in this situation,
Case for Discussion
The End of Lesson 12
