1.

a. The five characteristics of professional and professional behavior are Communicates effectively Thinks
rationally, logically, and coherently. Appropriately use technical knowledge Integrates knowledge from many
disciplines Exhibits ethical professional behavior.
b. Ethics is known as moral philosophy, involves systematizing, defending, and recommending concepts of
right and wrong behavior. Dictionary.com defines ethics as the rules of standards governing the conduct of a
person or the members of a profession. As in accountant we are sure that we have realized that behaving
ethically begins long before we enter the portion of our career. As professional accountants, we also are subject
to the ethical codes of the profession and the professional organizations of which we may be a part.
c. Right and duties school of ethical thinking feels that all individual have certain right others have the duty
not to interfere. The manager may act in ethical or unethical way to earn the bonus, but according to this school
of ethical thought, others should not impede the managers' actions. Manager has a duty not to interfere with the
right of colleagues to earn a bonus. Justice model it is the ethics feel that all people should be given what
they deserve. Example, Accountants who has worked hard for several years in a CPA firm would likely deserve
to be made a partner. Virtues model The virtues model asks managers to look inwardly to determine the
rightness of their actions. Manager who adheres to this definition of ethical behavior might have no difficulty in
misappropriating assets to help someone in need, since helping someone in need is a moral act.
d. Charles Ponzi collect money from investors but never purchase the international postal reply coupon.
Basically, he was using news investor money to pay off old investors. This practice has continued to the present
day; you may have heard frauds like this one referred to as pyramid ormultilevel marketschemes.
John Rigas purchased a Pennsylvania cable company for $300 in 1952. Twenty years later, he and his brother,
Gus, created the Adelphia Communications Corporation. Adelphia was a family-run business. The company
funded more than $2 billion in personal loans to the Rigas family. Adelphia management engaged in deceptive
accounting practices to meet analysts' expectation for profitability; the company also comingled its assets with
Rigas family's personal assets. Adelphia filed for bankruptcy in June 2002 and was delisted from NASDAQ.
Enron debacle may be the best-known accounting fraud in recent history. Enron filed for bankruptcy in
December 2001; at that time, it was the largest bankruptcy filing ever. Enron found itself with mounting
liabilities and loss of exclusive control over its pipeline. Eventually, most of Enron's business came from its
financial division, rather than from its original gas pipeline activities. The company's accounting information
system became rife with earnings management, off balance-sheet debt, and related-party transaction.
e. AIS plays an important role in the accounting system, controller using AIS to audit system. The above three
frauds case is using AIS to audit.
2.
a. Jim is acting professionally.
b. utilitarian model of ethics, rights and duties, justice model, virtues model. School of ethical thinking feels
that all individual have certain right others have the duty not to interfere. The manager may act in ethical or
unethical way to earn the bonus, but according to this school of ethical thought, others should not impede the

managers' actions. Manager has a duty not to interfere with the right of colleagues to earn a bonus.
c. No, he doesn't.
5.
a. Worldcom
Analysts and fund managers blindsided by WorldCom's accounting fraud insist they didn't have a clue. Was
there a smoking gun? Even knowing where to look, it's tough to find one among the five quarters of published
versions of the financials that were jiggered to the tune of $3.8 billion, allegedly by WorldCom's chief financial
officer. The scam wasn't as complex as that of Enron . At least on the surface it was simple. WorldCom says
that operating expenses for using other telecommunications companies' linesmainly for last-mile access to
homes and businesseswere reclassified as capital improvements. Because telco capital costs are charged as
depreciation against income over periods ranging from four to 40 years, the reclassification reduced expenses in
the past five reported quarters by at least $2.6 billion. Indeed, a careful con wouldn't mess with MCI line costs.
Access line statistics, while not included in WorldCom's financials, are tracked by the Federal Communications
Commission. It's easy to relate numbers of access lines to household subscribers and figure reasonable total line
costs. At the WorldCom division, the ratio is obscured by business and government customers that use many
lines. Yet line costs remained flat at 38% of revenue, while total revenue fell 6%within range of what's
reasonable given the division's higher-margin offerings such as Web hosting and private networks. At AT&T's
telephone operations, line costs also stayed flat, at 29% of revenue. Sprint doesn't break out line costs, but its
50% gross margins didn't budge. The capital-expense side of WorldCom's fraud ledger also appears OK.
Instead of increasing as the fraud would suggest, capital expense declined at both units by a combined 25%, to
$7.9 billion in 2001. That's spot on the $8 billion forecast by WorldCom's year 2000 annual report. At AT&T's
phone operations, capital expense decreased 19%, and at Sprint they increased 25%. The most apparent
smoking gun is a $3.5 billion increase in transmission-equipment assets. It's more like a leaky water pistol. The
percentage increase is half that notched in the boom year 2000. That's consistent with the overall decline in
capital spending. Now, any junior accountant can tweak a quarter or two. But it takes a real maestro to do it for
five full quarters and have the data line up like a business-school case study. In fact, the WorldCom data points
look too perfect. Other kinds of costs, such as maintenance-related labor, may have been put in play to finetune the tweaks. Most amazing, though, is that apparently a single person at a company the size and complexity
of WorldCom could reclassify $3.8 billion worth of expenses as easily as changing entries on a home-PC
personal finance program. Clearly, increased oversight of outside auditors and penalties for perpetrators isn't
enough. The focus should be on foiling fraud before damage is done. That requires real-time bookkeeping
controls. The most basic, which would have flagged the WorldCom flimflam, is mandatory review of revision
to entries before they are actually made. At the very least, changes that exceed cumulative thresholds should be
approved by internal auditors. Companies should also be required to publicly detail bookkeeping controls and
have them independently evaluated by accounting firms other than those who audit the financial statements.
Bernie Madoff
The shocking revelation that prominent investment manager Bernard Madoff's hedge fund, Ascot Partners, was
a giant scam will intensify redemptions from scores of other hedge funds that will be forced to liquidate

holdings and increase downward pressure on stock prices. This additional negative influence on the market,
together with liquidations by mutual funds facing redemptions and endowments facing the need for liquidity,
are three significant barriers for optimism about the direction of stock prices in the near term. The arrest of the
70-year-old Madoff, widely considered to have the magic touch as an investor, is another serious black eye for
the hedge fund industry and all non-transparent investment vehicles. Investors across the New York area have
clamored to be in Ascot because of the stability of double-digit returns and the reports of serious wealth
creation. The scandal is bound to reveal the inner workings of the hedge fund industry, whereby intermediary
feeders bring in their clients and take fees for putting clients with an investment manager. If Madoff hadn't
faced $7 billion in redemptions, this Ponzi scheme might not have been discovered. What's astonishing is that
he got away with it for so long with nobody discovering it. What his four family members in Ascot knew is a
puzzle that everyone wants answered, but one thing is certain: It's virtually impossible to have returns like
Madoff reported, and it should have been a major warning signal. Aside from the impact on stocks overall, the
exposure of fraud on a massive scale is also devastating to individuals who trusted Madoff with their fortunes
and to nonprofit organizations like Yeshiva University, which counted on Madoff's purported secret trading
system to help operate its institutions. Sterling Equities, the investment vehicle of the Wilpon family, which
owns the New York Mets baseball team, had $300 million reportedly invested in Ascot. So did some wealthy
investors who had money in related hedge funds who were never informed of ties to Ascot. Another private
bank executive placed $10 million from a client just two weeks ago. He knew of another family that had $100
million with Madoff. A woman in California told us that she had lost everything with Madoff and another
hedge fund. Everyone in New York wants to know how Madoff could have pulled off this Ponzi scheme
whereby these new investment funds were apparently used to pay double-digit returns to some of the older
investors. A charitable account that operates institutions in Israel received a 12% return recently. Other
individual investors report that they got nothing. Ascot's monthly reports are voluminous, showing many
transactions in and out of the market every day. Madoff was supposed to have some"black box"model that
signaled when to buy and when to sell. He was one of the most active traders in the marketplace, and his
annual returns in these short-term trades were mainly ordinary income, which made Ascot attractive mostly to
tax free institutions like foundations, hospitals and religious groups. After many years of returns in the range of
12% to 15%, in recent times the profits have been in the high single digits at times. If indeed, $50 billion was
lost, as apparently Madoff claims, it is the largest such fraud in history, and one that might even shame the
conman whose name is attached to this brand of deception. In 1920, Charles Ponzi, an Italian immigrant, began
advertising that he could make a 50% return for investors in only 45 days. Incredibly, Ponzi began taking in
money from all over New England and New Jersey. By July of 1920, he was making millions as people
mortgaged their homes and invested their life savings. As with all frauds, he was discovered to have a jail
record and was indicted on 86 counts of fraud. Some tens of millions of dollars were invested with him. Until
Madoff came along, the Equity Funding scandal may have been the largest fraud in dollar terms in U.S. history.
A publicly held company whose shares traded on the New York Stock Exchange, the top executives falsified
64,000 insurance policies that were used to report revenues of $2 billion. The company also sold $25 million in
counterfeit bonds and had missing assets of $100 million. Three auditors and high ranking executives served
prison terms.