Deck 3: Money, How We Get It, and Where It Goes: Accounting, Finance, and Investment Ethics

Question 1

Describe a time you or someone you know was defrauded or exploited by a company. What kind of scheme did the company use? What bias or heuristic did the company exploit? Was it wrong for the company and its representatives to engage in such practices? How can you make sure you do not fall victim to similar schemes in the future?

Answer 1

No Answer

Question 2

Why is "doing the right thing" often different than "doing the legal thing"? Why might the distinction between what is moral and what is legal be of particular concern to accountants and other kinds of financial auditors and overseers?

Answer 2

No Answer

Question 3

Explain how "managed earnings" might threaten the credibility of the U.S. financial reporting system. Should we abolish managed earnings? Why is it important to manage earnings?

Answer 3

No Answer

Question 4

Warren Buffett once compared good businesses to old-growth trees: they take a long time to mature, and once they have matured, they tend to stick around. Why might today's market conditions discourage the planting and care of, in Buffett's metaphor, slow-growing "old-growth" trees? How might accountants and other financial experts encourage the "long view" of a company's financial growth?

Question 5

Using a concrete example from your own life, use the "Ethical Decision Making" chart to solve a moral dilemma. Be sure to walk yourself carefully through each step on paper. Was it helpful? Did you come to the same conclusion that you did when you actually worked through the problem?

Question 6

Should "at-risk" investors have their ability to invest regulated in different ways than expert investors? Argue that all investors should have the same rights and protections. Then make the contrary argument using Frederick and Hoffman.

Question 7

Using Boatright, craft a code of finance ethics.

Question 8

Explain the two chief harm-based arguments against insider trading. What does Moore say about these arguments? Can you identify another problem with either argument?

Question 9

Explain why derivatives are, as Partnoy says, "a horror show." How can we make derivatives less dangerous and frightening? Or should they be abolished altogether?

Question 10

Should bankers sell stocks in other companies and financial advice to their customers? Why or why not?

Question 11

Using the concepts of the fiduciary relationship as defined by Moore and Partnoy, is the system of investing in derivatives and hedge funds ethically sound?

Question 12

Another name for a "pyramid scheme" is a

A) Fictitious-pricing scam
B) "pump and dump"
C) "bait and switch"
D) Madoff scheme
E) Ponzi scheme

Question 13

The __________ heuristic is the tendency people have to place inordinate weight on easily recalled events and memorable personal experiences in their deliberations.

A) Representativeness
B) salience
C) availability
D) anchoring
E) bias

Question 14

Because money has become abstract, it depends entirely on:

A) Deception
B) Precious metals
C) Computers
D) Trust
E) Fraud

Question 15

Arthur Levitt, chairman of the Securities and Exchange Commission, thinks that what is at stake when companies begin to engage in managing their earnings?

A) Millions of U.S. companies' dollars
B) Nothing
C) The credibility of the U.S. financial reporting system
D) A financial "civil war"
E) All of the above

Question 16

What is the term for a financial asset that should have been recognized in one financial period but instead was put aside for use in a period of loss?

A) Cookie-jar reserves
B) Derivatives
C) Stash-pile reserves
D) The closet
E) A company's back pocket

Question 17

High levels of knowing and willful (mis)conduct are what Richard Walker and others at the SEC have argued should be the factor that causes the leadership at an investigated company to:

A) File for bankruptcy
B) Turn themselves in to the authorities for a possible reduced sentence
C) Turn their backs on their employees
D) End up in criminal court
E) End up in civil court

Question 18

Thomas Fischer, former managing partner for the Milwaukee office of Arthur Andersen, blames the recent increase in corporate scandals on what he calls:

A) Flying under the radar
B) False delusions
C) Renewed economic pressures
D) Social and economic blow-off
E) Social and economic blindness

Question 19

In Cohen's article, what do Arthur Anderson employees say about the Enron scandal?

A) The firm pressured employees to "cook" the books.
B) The firm was doing "drive-by" auditing.
C) The firm was made into a scapegoat and unfairly blamed.
D) The firm was using the same accounting practices as most other firms.
E) Both (c) and (d)

Question 20

What reason do Frederick and Hoffman offer in favor of restricting investors?

A) The intention is to protect their interests and prevent them from harm.
B) The intention is to make a profit.
C) The intention is to allow the market to be free.
D) The intention is to allow the investors to be free.
E) Both (c) and (d)

Question 21

What reason do Frederick and Hoffman offer against restricting investors?

A) Investors who are not expert may not understand the choices they must make.
B) It is hard to learn to be an expert investor.
C) It is hard to know what is in someone else's best interest.
D) It is good for the market if some people lose a lot of money on risky investments.
E) Investors have a right not to be harmed.

Question 22

__________ has the specific authority to limit the access of individual investors to the financial markets of the United States.

A) The president
B) Congress
C) Wall Street
D) The FBI
E) The SEC

Question 23

What kind of investor is the most likely candidate to be denied access to the securities markets?

A) Any and all individual investors
B) High-risk investors
C) Certain kinds of financial lawyers
D) Employees of the SEC
E) Government officials with ties to the securities market

Question 24

Frederick and Hoffman argue that, just as with prescription drugs, at-risk investors should be required by law to:

A) Prove their need before "taking their medicine"
B) Prove their ability to pay
C) Carry appropriate insurance
D) Engage the services of an expert
E) Both (b) and (d)

Question 25

Financial markets are vulnerable to all of the following EXCEPT:

A) Unfair trading practices
B) Self-regulation
C) Contractual difficulties
D) Unfair conditions
E) The financial markets are not vulnerable to any of the above

Question 26

According to Boatright, despite the fact that financial decision making is typically limited to the financial factors of risk and return over time, ethics must consider what?

A) The fact that financial activity takes place in a small economic, but large social, setting
B) How the money makes it back to the investor as quickly as is fair to the company
C) The ethical treatment of the consumers only
D) The ethical treatment of everyone affected by a decision
E) Both b and c

Question 27

Opportunism, or shirking, occurs as a result of what?

A) The tendency of agents to seek their own interests
B) A close relationship between management and agent
C) A close relationship between agent and investor
D) High amounts of projected risk
E) All of the above

Question 28

Economists and legal scholars seem to think that information is what?

A) A type of property
B) Inherently useless
C) Somewhat useful in many cases
D) Too bountiful to be useful
E) No replacement for "cold hard cash"

Question 29

There are two principal harm-based arguments against insider trading. One is that the practice is harmful to individual investors who have no insider access. The other is that:

A) Permitting insider trading would lead to more bankrupt companies and therefore the loss of jobs.
B) Permitting insider trading would weaken investor confidence.
C) Permitting insider trading would destroy the market quickly.
D) No one should have access to insider information because it is illegal.
E) People like Martha Stewart need to "go to jail once in a while."

Question 30

Moore thinks that the traditional arguments against insider trading are:

A) Silly
B) Insufficient alone
C) Adequate but poorly argued
D) Out of date
E) Perfectly adequate and in no need of change

Question 31

Many of the recent problems in derivatives markets have been where?

A) China
B) California
C) New Mexico
D) Canada
E) Thailand

Question 32

The type of derivatives that seem to be the most troublesome are:

A) Traditional derivatives
B) Derivative securities
C) Exchange-traded derivatives
D) Derivatives that are not traded on any exchange
E) All derivatives

Question 33

The buyer of a put option, according to Partnoy, wants the price of it to __________, whereas the seller of the option wants it to __________.

A) stay the same, go up
B) stay the same, go down
C) go down, stay the same or go down
D) go up, go down
E) go down, stay the same or go up

Question 34

Aristotle argues that ethical failures and unhappiness often result from:

A) Excess
B) Moderation
C) Virtue
D) Wealth
E) Liberality

Question 35

Farrell compares derivatives to the black market because:

A) Derivatives are illegal, like black market sales.
B) Derivatives are profitable, like selling on the black market.
C) Derivatives are a way to avoid taxes and government regulations.
D) Both (b) and (c)
E) All of (a), (b), and (c)

Question 36

McDonald says that hedge funds are:

A) Exotic and rarely seen
B) Safe and conservative
C) Used by most financial institutions
D) Not allowed to employ short selling
E) Not very profitable

Question 37

According to McDonald, leverage is:

A) Diversifying by putting money in many different investments
B) Borrowing money and then risking it without a way to cover the potential loss
C) Considering how the investment will look in three to five years
D) Charging investors very high fees
E) Keeping enough capital on hand to cover any losses sustained

Question 38

What could cause the "doomsday scenario" that McDonald describes?

A) Too many people investing in hedge funds
B) The secrets of hedge funds being broadcast on the media
C) Hedge fund managers getting too conservative
D) A sharp increase in interest rates
E) A sudden fall in interest rates

Question 39

Niall Ferguson says that the financial crisis of 2008 happened because:

A) American companies were not creating new products.
B) Productivity had decreased.
C) There were too many defaults on subprime mortgages.
D) There were too many risky investments like derivatives and hedge funds.
E) The government took over some financial institutions.

Question 40

Fannie Mae, Ginnie Mae, and Freddie Mac were created to:

A) Provide free housing to low-income Americans
B) Provide government-guaranteed mortgages, helping more Americans own homes
C) Provide high-risk, high-return investment opportunities
D) Make money for the government
E) Provide tax relief for Americans who already owned their homes

Question 41

Which of these is an example of a derivative?

A) In January, you sign a contract that you will buy a farmer's hay in August, and you fix the price at that time.
B) In January, you take an option on the hay, agreeing that you have the right to buy it in August, but not the obligation.
C) In January, you buy the farmer's land and hire the farmer to grow hay for you.
D) Both (a) and (b) are examples of derivatives.
E) All of (a), (b), and (c) are examples of derivatives.

Question 42

In the 1990s, quantitative analysts used mathematical formulas to price derivatives and predict the market. According to Ferguson, why didn't these formulas help them avoid the crisis of 2008?

A) The formulas were overly complex and hard to use.
B) Computers were not powerful enough in the 1990s.
C) The markets are affected by human emotion, which is hard to calculate.
D) The markets change over time, and the formulas stayed the same.
E) Dishonest analysts used the formulas for their own benefit.

Question 43

William Black says that banks hate free markets because:

A) Competition encourages fraud and dishonesty.
B) Banks are forced to take on very high corporate debt.
C) Competition encourages people to be self-interested.
D) Competition drives down interest rates and all banks lose money.
E) Banks are forced to take loans that are unlikely to be repaid.

Question 44

Money has no value in itself; its value is rather a representation of mutual trust.

Question 45

Today, most financial transactions involve paper documents.

Question 46

Many of today's most common basic types of business fraud have been around for centuries.

Question 47

Most architects of deceptive business practices have learned to do so from the research findings of psychologists and behavioral economists.

Question 48

According to Loomis, high-up employees who commit accounting fraud plan out their schemes in great detail before perpetrating the act.

Question 49

It seems clear in the wake of so many criminal cases against CEOs that the business culture will soon make drastic changes to the way in which it conducts business.

Question 50

The dismantling of Arthur Andersen cost only 10,000 employees their jobs.

Question 51

Thomas Fischer believes that accountants should be examples of ethical behavior for the rest of the business world.

Question 52

Paternalism is an argument used to justify restricting the investments of at-risk investors.

Question 53

Frederick and Hoffman believe that some paternalistic acts are quite justified.

Question 54

Financial markets are vulnerable to unfair trading practices, unfair conditions, and contractual difficulties.

Question 55

A fiduciary has a special duty to act in another person's interest.

Question 56

Moore argues that information is a valuable thing and can usefully be viewed as a type of property.

Question 57

Moore argues that there is nothing wrong with insider trading.

Question 58

Partnoy thinks that it is a myth that anyone ever really owns derivatives.

Question 59

A put option is an agreement to buy a product at a specified time and price.

Question 60

Warren Buffett called derivatives "a financial weapon of mass destruction."

Question 61

Farrell believes that derivatives could not have much effect on the world market.

Question 62

Hedge funds are carefully regulated by the government to make them safe investments.

Question 63

Hedge funds require time and careful study, and therefore it is rather difficult to make any money quickly by investing in them.

Question 64

In 2006, the total value of the stock market was higher than the economic output of the whole world.

Question 65

Ferguson writes that inflation has gone up since 1979.

Question 66

The true value of money is not inherent, but is based on __________.

Question 67

Most people have a tendency to experience a particular economic loss as more __________ than an equivalent economic gain.

Question 68

The __________ heuristic is the tendency people have to give inordinate weight to anecdotal social cues and markers when making judgments of economic value.

Question 69

__________ is a term used to express the misrepresentation of a business to the public sphere, causing it to appear predictable and smooth when it is really not.

Question 70

Arthur Andersen was the accounting firm that worked for __________.

Question 71

It is too much to expect that the average __________ be fully responsible and informed of his or her financial state.

Question 72

Providing information to investors is one function of the _________.

Question 73

According to Boatright, the main aim of federal securities laws is expressed by the phrase __________.

Question 74

The concept of a level playing field is often used to symbolize __________.

Question 75

A(n) __________ is a person who is entrusted to act in the interests of another.

Question 76

Moore considers the argument that _____________ is a kind of property.

Question 77

Moore argues that ____________________ threatens the fiduciary relationship, which is important to business.

Question 78

One billionaire trader, George Soros, has warned that trading __________ will cause extreme instability and threaten to dismantle society itself.

Question 79

The derivatives bubble has grown parallel to the subprime credit meltdown, triggering a(n) __________.

Question 80

Managers can sometimes use derivatives to hide __________ from shareholders.