Deck 8: International Financial Reporting: Ethics and Corporate Governance Considerations

Question 1

The rules under IFRS for property, plant, and equipment differ from U.S. GAAP because:

A) U.S. GAAP allows for the revaluation of property, plant, and equipment
B) IFRS allows for the revaluation of property, plant, and equipment
C) U.S. GAAP allows for recovery of revaluation amounts
D) IFRS prohibits the revaluation of property, plant, and equipment

Answer 1

B

Question 2

The reason some people are concerned about the possibility for earnings management under IFRS is:

A) The principles-based system might lead preparers of financial statements to try and justify earnings by applying a substance over form concept
B) The principles-based system might lead preparers of financial statements to try and justify specific accounting outcome based on commercial drivers
C) It is more difficult to make materiality judgments
D) It is more difficult to implement a set of generally accepted accounting and financial reporting standards

Answer 2

B

Question 3

Secret reserves are designed to conceal the true financial position and earnings, which are different than shown on the balance sheet and income statement. The best statement of how secret reserves are related to fraud and ethics is:

A) Secret reserves often lead to smoothing net income over time.
B) Secret reserves make the information in financial statements inconsistent.
C) Secret reserves are legal and normal operating practices in all countries around the world.
D) Secret reserves can give the sense of financial security to the shareholders and regulators.

Answer 3

A

Question 4

A "secret" or "hidden" reserve can occur when a company does one or more of the following

A) Deliberately measure an asset at an unsubstantiated high value
B) Deliberately measures an asset at an unsubstantiated low value
C) Sets up overstated accrual liabilities
D) All of these

Question 5

The Norwalk agreement refers to:

A) The commitment of the U.S. and European Union to adopt one set of accounting standards
B) The commitment of FASB and the International Accounting Standards Board (IASB) to adopt one set of accounting standards
C) The commitment of FASB and IASB to the convergence of U.S. GAAP and international accounting standards
D) The agreement that ended World War II

Question 6

The SEC is now calling the movement of U.S. GAAP to IFRS:

A) Comparability
B) Condorsement
C) Convergence
D) Conversion

Question 7

The difference between provisions and reserves can best be characterized as:

A) Provisions are liabilities recognized by charges against profit whereas a reserve is an element of shareholders' equity
B) Provisions are an element of shareholders' equity whereas a reserve is a liability recognized by charges against profit
C) Provisions reduce assets to net realizable value whereas reserves are liabilities recognized by charges against profit
D) Reserves always reduce profits

Question 8

Lease standards in the U.S. can be manipulated to achieve the desired goal of:

A) Determining lease payments at their present values to record an asset instead of an expense
B) Determining lease payments at their present values to record an expense instead of an asset
C) Emphasizing form over substance
D) All of these

Question 9

In the U.S., the word "reserve" always means:

A) Impairment
B) A market value adjustment
C) Provision
D) A depreciation write-down

Question 10

Gray uses Hofstede's cultural values to identify four widely recognized accounting values; these values include all of the following except for:

A) Transparency
B) Representational faithfulness
C) Uncertainty
D) Conservatism

Question 11

The SEC study of a principles-based system identifies each of the following characteristics that should guide standards setting except for:

A) Be based on an improved and consistently applied conceptual framework
B) Clearly state the accounting objective of the standard
C) Minimize exceptions from the standards
D) Minimize the detail and structure so that the standard can be operationalized and applied on a consistent basis

Question 12

Gray's study uses secrecy as the preference for confidentiality and restrictions on disclosures; this is associated with all of the following except:

A) Higher power distance
B) Lower masculinity
C) Lower individualism
D) Higher uncertainty avoidance

Question 13

The relatively more principles-based IFRS standards requires each of the following except for:

A) Professional judgment based on the substance over form concept
B) Professional judgment in applying the true and fair view override
C) Professional judgment at both the transaction and financial statement levels
D) Professional judgment in applying the present fairly concept

Question 14

A common set of accounting standards on an international level can help to achieve each of the following except for:

A) Facilitate the understandability of financial reports prepared outside the home country of a potential investor
B) Facilitate international investment
C) Provide a foundation for professional judgment and support the implementation of international financial reporting standards (IFRS)
D) Facilitate the enforcement of IFRS

Question 15

Given that IFRS is not currently required in the U.S., foreign companies that list their stock on the New York Stock Exchange must:

A) Reconcile the financial statements in their home country GAAP to U.S. GAAP
B) Use IFRS in their financial statements
C) Either reconcile their statements to U.S. GAAP or use IFRS
D) Use their home country GAAP in their financial statements listed on the NYSE

Question 16

A study by the SEC notes that imperfections exist when standards are established on either a rules-based or a principles-based basis only. The SEC recommends that standards should have all of the following characteristics except:

A) Enumerate exceptions from the standard.
B) Provide sufficient detail and structure so that the standard can be operationalized and applied on a consistent basis.
C) Avoid use of bright lines that allow structuring of financial transactions to achieve technical compliance while evading the intent of the standard.
D) Be based on a consistently applied conceptual framework.

Question 17

IFRS tends to be more ____________ than U.S. GAAP.

A) rules-based
B) principles-based
C) consistent
D) accurate

Question 18

The IFAC, IAESB and IESBA ethical principles are similar to those in the AICPA Code except for:

A) Integrity
B) Objectivity
C) True and fair view
D) Professional competence

Question 19

The U.K. Bribery Act is enforced by the Serious Fraud Office (SFO); the agency has provided a list of corruption indicators. These include all of the following except for:

A) Abnormal cash payments and lavish gifts.
B) Agreeing to contracts favorable to the organization.
C) Private meeting with public contractors or companies hoping to tender an offer for contracts.
D) Unexplained preference for certain contractors during the tendering process.

Question 20

One problem of a more principles-based system that was pointed out in an SEC study is that they:

A) Tend to be rules-based more than objectives-oriented standards
B) May present enforcement problems
C) Use bright-line tests
D) All of these

Question 21

The UK Bribery Act establishes six principles to guide adequate procedures to deal with bribery including:

A) Risk assessment
B) Tone at the top
C) Whistleblowing
D) Audit committee

Question 22

A member body of the International Federation of Accountants (IFAC) should follow the provisions of the home country's code of ethics rather than the Code of Ethics for Professional Accountants (IFAC Code) when:

A) The home country standards of the member body are more stringent than those in the IFAC Code.
B) The member body disagrees with IFAC Code provisions.
C) The home country standards of the member body are less strict than those in the IFAC Code.
D) All of these.

Question 23

The Global Survey on Business Ethics reports each of the following results except for:

A) There has been an increase of 10 to 15% in the number of organizations providing both statements of ethical values and a code of ethics
B) A "tone at the top" is followed in a majority of the companies
C) Just over one-third agree or strongly agree that ethical standards are not fully monitored
D) There has been an increase in those observing ethical misconduct over the course of a year

Question 24

One feature of corporate governance in Germany that makes it stand out when compared to the U.S. is:

A) A separate audit committee and a board of directors
B) A unitary board of directors system
C) A dual board of directors system
D) Compliance with the Sarbanes-Oxley Act

Question 25

According to CLSA Corporate Governance Watch 2012:

A) India's corporate governance score declined by three percentage points from 2010 to 2012
B) China's corporate governance score increased by four percentage points from 2010 to 2012
C) Singapore had the highest corporate governance score
D) All of these

Question 26

The term "small and medium-sized" entities in the IASB's pronouncement on IFRS for Small and Medium-sized Entities (SMEs) defines SMEs as:

A) Those entities with public accountability that publish general purpose financial statements
B) Those entities without public accountability that publish general purpose financial statements
C) Those entities that use IFRS in their general purpose financial statements
D) Those entities that use U.S. GAAP in their general purpose financial statements

Question 27

Good ethics is important on a global level because

A) There needs to be a mechanism to punish companies that violate ethical standards outside their home country
B) International enforcement of IFRS depends on ethical behavior in the accounting and financial reporting process
C) Multinational companies should strive to act ethically in all activities whether at home or abroad
D) All of these

Question 28

The exposure draft, Responding to a Suspected Illegal Act, states that a professional accountant who suspects some act or activity may be illegal would be required to do each of the following depending on the outcome of discussions at each stage of the process except for:

A) Discuss the issue with the appropriate level of management
B) Take the issue to higher levels of management
C) Discuss the issue to the external auditors
D) Take the issue to outside authorities if necessary

Question 29

A distinguishing characteristic(s) of corporate governance in India is the importance of:

A) Some government ownership of Indian entities
B) Family ownership of Indian entities
C) A large industrial group may own shares in an Indian entity
D) All of these

Question 30

Each of the following is an example of the difference between application of full-IFRS and IFRS for SMEs except for:

A) Cost or revaluation method for full-IFRS; cost method only for IFRS for SMEs
B) Revaluation method for full-IFRS; cost or revaluation for IFRS for SMEs
C) Expensing of all research and development costs as incurred for full-IFRS and capitalizing and amortizing development costs that meet specific criteria; expensing of all research and development costs as incurred for SMEs
D) Capitalizing borrowing costs if certain criteria are met for full-IFRS; expensing all borrowing costs for IFRS for SMEs

Question 31

The CIMA Code of Ethics identifies the following common threats to the fundamental principles of professional behavior except for:

A) Self-motivated threat
B) Self-interest threat
C) Familiarity threat
D) Intimidation threat

Question 32

The Serious Frauds Office in the UK identified each of the following as a "red flag" indicating corruption may exist except for:

A) Abnormal cash payments
B) Payments made through a third-party country
C) Payments made behind schedule
D) Agreeing to contracts not favorable to the organization

Question 33

One way to characterize the term "true and fair view is" that it:

A) It is used to determine which international auditing standards should be used
B) It is used to assess whether the entity has met the comply or explain provisions in corporate governance codes
C) It is a governing criterion by which financial statements are to be judged
D) All of these

Question 34

Under a dual board system, the board that carries out management directives for the benefit of various stakeholder groups is:

A) The Management Board
B) The Supervisory Board
C) The Board of Governors
D) The Board of Trustees

Question 35

The following is a similarity between the AICPA Code of Professional Ethics and the IFAC Code:

A) To engage in whistleblowing when the audit client refuses to make recommended changes in the financial report
B) To report to the audit committee all differences in opinion on accounting matters
C) To identify threats to independence and develop safeguards to mitigate the threats
D) All of these

Question 36

The 2012 Global Fraud Survey of the ACFE points to the need for management to "walk the talk" of ethics by:

A) Clearly demonstrating that noncompliance will lead to firing of the guilty employee
B) Treat different offenses the same to develop consistency in policies
C) Encourage whistleblowing to provide a mechanism to report wrongdoing
D) Being consistent for particular offenses to avoid the appearance of selective enforcement

Question 37

The comply or explain principle refers to:

A) Certification of financial statements by CEOs and CFOs
B) Explain any gaps between existing corporate governance practices and recommendations by authoritative bodies/pronouncements and actual governance policies
C) Explain any gaps between existing corporate governance practices and IFRS requirements
D) Certification of corporate governance practices by CEOs and CFOs

Question 38

The primarily role of the Supervisory Board is to:

A) Manage the enterprise for the benefit of various stakeholder groups
B) Work with the auditors in their review of financial statements
C) Work with the managing board in running day-to-day operations
D) Oversee and advise the Managing Board on policy matters

Question 39

A distinguishing characteristic(s) of corporate governance in China is the importance of:

A) State investors in Chinese entities
B) Family ownership of Chinese entities
C) Blockholders of Chinese entities
D) All of these

Question 40

The 2012 Global Fraud Survey conducted by the ACFE identifies each of the following efforts to combat global fraud except for:

A) Evaluate the legal and regulatory enforcement environment
B) Assess risks to the company's business, brand, and reputation
C) Create a level of independence from accountants and auditors so fraud can be more easily detected
D) Educate the workforce about the risks of wrongdoing

Question 41

The trigger event that led to the disclosure of the scandal at Parmalat was:

A) Almost €4 billion of company funds that were supposed to be held in an account at Bank of America did not exist
B) The company stuffed the channels with product that it eventually was not purchased by customers
C) Parmalat officers violated the Foreign Corrupt Practices Act
D) The company sold sour milk

Question 42

The primary accounting issue in the Royal Dutch Shell case is:

A) The failure of the company to properly account for oil exploration costs
B) The failure of the company to adhere to provisions of the Foreign Corrupt Practices Act
C) The failure of the company to adhere to SEC rules and the accounting for proved reserves
D) All of these

Question 43

Explain the relationship between Gray's accounting values and Hofstede's cultural values. Give an example of how these values are related in a particular country of your choice except the U.S.

Question 44

Why is it important to have a Global Code of Ethics for professional accountants around the world? That is, what is such a code trying to accomplish?

Question 45

Full-IFRS permits the revaluation of property, plant, and equipment while IFRS for SMEs does not. In the U.S., the cost method (less amortization) must be used. From a conceptual framework perspective, is it possible to justify the use of the revaluation technique? Be sure to describe relevant concepts in answering this question. Why do you think IFRS for SMEs does not permit revaluation while full-IFRS does? Are these inconsistent requirements?

Question 46

Explain the difference between global fraud, bribery, and illegal acts. What standards exist on a global level to combat these problems?

Question 47

In China and India different ownership groups often play a role much more important than these groups play in the U.S. Describe the different ownership patterns in China and India. Why do you think these groups have a larger role to play? Are there any concerns about the fact that they play such a larger role?

Question 48

From a U.S. perspective, are there any concerns that regulators and standard setters should have about moving towards the adoption of IFRS in the U.S.? Why are they concerns?

Question 49

Explain why you think the authors of studies cited in the text were concerned about whether a principles-based approach to standard setting might lead to earnings management.

Question 50

The Olympus case deals with which of the following accounting issues:

A) Booking impairment losses
B) Selling bad assets to make investment losses smaller
C) Concealing investment losses
D) All of these
Essay Questions

Question 51

The case that deals with conflicts between management and the board of directors and the role of family members in various business entities is:

A) Parmalat
B) Satyam
C) Olympus
D) Royal Dutch Shell

Question 52

The Autonomy case deals with which of the following accounting issues:

A) Valuation of the British software company
B) Secret reserves
C) Fraud committed by KPMG
D) All of these

Question 53

Explain the role of ethics and virtue-based principles in evaluating whether financial information faithfully represents economic phenomena.

Question 54

Consider the discussion in the chapter about establishing one set of accounting standards and comment on whether you think there should be one set of educational standards for accounting students at educational institutions in countries that comply with IFRS. Should there be a uniform CPA (Chartered Accountants) Exam for all such students? Why or why not?

Question 55

In the SEC v. Siemens Aktiengesellschaft case, each of the following charges were made against the company's' Managing Board except for:

A) The Board failed to ensure that Siemens met the U.S. regulatory and anti-bribery provisions of the Foreign Corrupt Practices Act
B) The Board failed to meet its obligations with respect to compliance procedures at Siemens
C) The Board failed to adequately supervise the auditors of Siemens
D) The Board created a corporate culture that contributed toward tolerating and even rewarding bribery

Question 56

Explain how cultural values that exist in a country influence a country's accounting values.

Question 57

Compare and contrast corporate governance provisions in the U.S. with those in Germany? Where differences exist, evaluate whether you think the U.S. system is preferable or the German system.

Question 58

In some countries the laws and regulations play a much bigger role in establishing accounting and financial reporting standards than in the U.S. Discuss the difficulties that may arise on an international level in the process of developing IFRS given the varying influences of governments and regulators in the national standard setting process.