Pertains to the principles of conduct that
individuals use in making choices and guiding
their behavior in situations that involve the
concepts of right and wrong.
Business Ethics
How do managers decide on what is right
in conducting business?
Once managers have recognized what is
right, how to they achieve it?
The necessity to have an articulate
foundation for ethics and a consistent
application of the ethical standards.
IT Auditing & Assurance, 2e, Hall &
Singleton
Basis of Ethical Standards




Religious
Philosophical
Historical
IBM combination of all three
Ethical Issues in Business [Table 11-1]
 Equity
 Exec. salaries
 Pricing
 Rights
 Health (screening)
 Privacy
 Sexual harassment
 Equal opportunity
 Whistleblowing
 Honesty
 Conflicts of interest
 Security of data & records
 Foreign practices [FCPA]
 Accurate F/S reporting
 Exercise of Corp. Power
 PAC, and politics
 Workplace safety
 Downsizing, closures
IT Auditing & Assurance, 2e, Hall &
Singleton
1990 Business Roundtable
 Greater commitment of top management
 Written codes (policy) that clearly
communicate standards and expectations
 Programs to implement ethical guidelines
 Techniques to monitor compliance
 Boeing
 Uses line managers to lead ethics training
 Toll-free number to report violations
 General Mills
 Published guidelines with vendors, competitors, customers
 Johnson & Johnson
 Creed integral to its culture
 Uses surveys to ascertain compliance
 SAIC
 Toll-free number, required training, separate dept.
IT Auditing & Assurance, 2e, Hall &
Singleton
Role of Management
 Create and maintain appropriate ethical atmosphere
 Limit the opportunity and temptation for unethical
behavior
 Management needs a methodology for including
lower-level managers and employees in the ethics
schema
 Many times, lower-level managers responsible to uphold
ethical standards
 Poor ethical standards among employees are a root cause of
employee fraud and abuses
 Managers and employees both should be made
aware of firm’s code of ethics
 What if management is unethical? e.g., Enron
IT Auditing & Assurance, 2e, Hall &
Singleton
Reported Abuses
 Typically junior employees (Wall Street Journal)
 Half of American workers believe the best way
to get ahead is politics and cheating
 One-third of a group of 9,175 surveyed had
stolen property and supplies from employers
 Ethics Resource Center: 1994 study
 41% falsified reports
 35% committed theft
Ethical Development
 Most people develop a personal code of ethics from
family, formal education, and personal experience
 Go through stages of moral evolution [Figure 11-2]
IT Auditing & Assurance, 2e, Hall &
Singleton
Making Ethical Decisions
 Business schools can and should be involved in ethical
development of future managers
 Business programs can teach students analytical techniques to
use in trying to understand and properly handle a firm’s conflicting
responsibilities to its employees, shareholders, customers, and
the public
 Every ethical decision has risks and benefits. Balancing them is
the manager’s ethical responsibility:
Ethical Principles
 Proportionality: Benefits of a decision must outweigh the
risks. Choose least risky option.
 Justice: Distribute benefits of decision fairly to those who
share risks. Those who do not benefit should not carry any
risk
 Minimize Risk: Minimize all risks.
IT Auditing & Assurance, 2e, Hall &
Singleton
The analysis of the nature and social impact
of computer technology and the
corresponding formulation and justification
of policies for the ethical use of such
technology.
Levels of Computer Ethics
 POP: the exposure to stories and reports in popular media
 PARA: taking a real interest in computer ethics cases and
acquiring some level of skill and knowledge
 THEORETICAL: multi-disciplinary researchers who apply the
theories of philosophy, sociology, and psychology to computer
science, intending to bring some new understanding to the field.
That is, ethics research.
IT Auditing & Assurance, 2e, Hall &
Singleton
A new problem or just a new twist to an old
problem?
Although computer programs are a new type of
asset, many believe that they should not be
considered as different form other forms of
property; i.e., intellectual property is the same as
real property and the rights associated with real
property.
IT Auditing & Assurance, 2e, Hall &
Singleton
1. Privacy:


Ownership of personal information
Policies
2. Security:


Systems attempt to prevent fraud and abuse of
computer systems, furthering the legitimate
interests of firm
Shared databases have potential to disseminate
inaccurate info to authorized users
3. Ownership of Property:

Federal copyright laws
4. Race:

African-Americans and Hispanics constitute 20%
of population but 7% of MIS professionals
IT Auditing & Assurance, 2e, Hall &
Singleton
5. Equity in Access:


Some barriers are avoidable, some are not
Factors: economic status, affluence of firm,
documentation language, cultural limitations
6. Environmental Issues:



Should firms limit non-essential hard copies?
What is non-essential?
Disposal of equipment and supplies (toner)
7. Artificial Intelligence:


Who is responsible for faulty decisions from
an Expert System?
What is the extent of AI/ES in decision-making
processes?
IT Auditing & Assurance, 2e, Hall &
Singleton
8. Unemployment & Displacement:


Computers and technology sometimes replace jobs
(catch-22, productivity)
Some people unable to change with IT, get displaced
and find it difficult to obtain new job
9. Misuse of Computer:



Copying proprietary software
Using a firm’s computers for personal benefit
Snooping through firm’s files
10. Internal Control Responsibility:



Unreliable information leads to bad decision, possible
financial distress
Management must establish and maintain a system of
appropriate internal controls to ensure integrity and
reliability of data (antithetical)
IS professionals and accountants are central to
adequate internal controls
IT Auditing & Assurance, 2e, Hall &
Singleton
The lack of ethical standards* is fundamental to the occurrence of
business fraud.
No major aspect of the independent auditor’s role has caused more
difficulty for public accounting than the responsibility for detection of
fraud during an audit. [article]
This issue has gathered momentum outside the accounting profession to
the point where the profession faces a crisis in public confidence in
its ability to perform independent attest functions. [SAS 82]
Fraud denotes a false representation of a material
fact made by one party to another party with the
intent to deceive and induce the other party to
justifiably rely on the fact to his/her detriment, i.e.,
his/her injury or loss.
Synonyms: White-collar crime, defalcation,
embezzlement, irregularities.
IT Auditing & Assurance, 2e, Hall &
Singleton
A fraudulent act must meet the following
5 conditions:
1.
2.
3.
4.
5.
False representation
Material fact
Intent
Justifiable reliance
Injury or loss
IT Auditing & Assurance, 2e, Hall &
Singleton
 Asset misappropriation fraud
1.
2.
3.
4.
Stealing something of value – usually cash or inventory (i.e.,
asset theft)
Converting asset to usable form
Concealing the crime to avoid detection
Usually, perpetrator is an employee
 Financial fraud
1.
2.
3.
4.
5.
Does not involve direct theft of assets
Often objective is to obtain higher stock price (i.e., financial fraud)
Typically involves misstating financial data to gain additional
compensation, promotion, or escape penalty for poor performance
Often escapes detection until irreparable harm has been done
Usually, perpetrator is executive management
 Corruption fraud
1. Bribery, etc.
IT Auditing & Assurance, 2e, Hall &
Singleton
 Fraudulent financial statements {5%}
 Corruption {10%}
 Bribery
 Illegal gratuities
 Conflicts of interest
 Economic extortion
 Asset misappropriation {85%}
 Charges to expense accounts
 Lapping
 Kiting
 Transaction fraud
IT Auditing & Assurance, 2e, Hall &
Singleton
 Employee Theft
1) Theft of asset
2) Conversion of asset (to cash, to
fraudster)
3) Concealment of fraud
IT Auditing & Assurance, 2e, Hall &
Singleton
 Special Characteristics:
1. Perpetrated at levels of management above the
one where internal controls relate
2. Frequently involves using the financial statements
to create false image of corporate financial health
3. If fraud involves misappropriation of assets, it
frequently is shrouded in a complex maze of
business transactions, and often involves third
parties. [e.g., ZZZZ Best fraud]
IT Auditing & Assurance, 2e, Hall &
Singleton
 People engage in fraudulent activities as a result of forces
within the individual (their ethical system) and without (from
temptation and/or stress from the external environment)
1. Situational Pressures
2. Opportunity
3. Rationalization
 A person with a high level of personal ethics and limited
pressure and opportunity to commit fraud is most likely to
behave honestly [Figure 11-2]
 A person with low level of integrity, and moderate to high
pressures, and moderate to high opportunity is most likely
to commit fraud
 Auditors can develop a “red flag” checklist to detect
possible fraudulent activity
 A questionnaire approach could be used to help auditors
uncover motivations for fraud
IT Auditing & Assurance, 2e, Hall &
Singleton
Do key executives have unusually high personal debt?
Do key executives appear to be living beyond their means?
Do key executives engage in habitual gambling?
Do key executives appear to abuse alcohol or drugs?
Do key executives appear to lack personal codes of ethics?
Do key executives appear to be unstable (e.g., frequent job or residence
changes, mental or emotional problems)?
Are economic conditions unfavorable within the company’s industry?
Does the company use several different banks, none of which sees the
company’s entire financial picture?
Do key executives have close associations with suppliers?
Do key executives have close associations with members of the Audit
Committee or Board?
Is the company experiencing a rapid turnover of key employees, either
through quitting or being fired?
Do one or two individuals dominate the company?
Does anyone never take a vacation?
IT Auditing & Assurance, 2e, Hall &
Singleton

1996, 2002, and 2004 study by Association of CFE (“Report to the
Nation”) estimated losses from fraud and abuse at 6% of annual
revenues! Based on GDP in 2002, that would be $600B, and in
2004 $660B in losses.

Actual cost is difficult to quantify because:
1. All fraud is not detected
2. Of ones detected, not all are reported
3. In many cases, incomplete information is gathered
4. Information is not properly distributed to management or law
enforcement authorities
5. Too often, business organizations decide to take no civil or
criminal action against the perpetrator of fraud

Organizations with 100 or fewer employees were the most
vulnerable to fraud
 SEC fraud violations reported in COSO “Landmark Study” 1998
IT Auditing & Assurance, 2e, Hall &
Singleton
 Profile of perpetrator:





By position – Table 11-3
By gender – Table 11-5
By age – Table 11-6
By Education – Table 11-7
Conclusions about profile?
 Fraudsters do not look like crooks!
 Collusion – Table 11-4
1. Significant reason to adhere to segregation of
duties
2. Risks associated with a key position held by a
trusted employee who unknowingly has weak
ethics
IT Auditing & Assurance, 2e, Hall &
Singleton
 Lack of auditor independence
 Lack of director independence
 Questionable executive
compensation schemes
 Inappropriate accounting practices
IT Auditing & Assurance, 2e, Hall &
Singleton
 PCAOB
 Auditor independence
 List of services considered non-
independent
 Corporate governance
 Issuer and management disclosure
 Fraud and criminal penalties
IT Auditing & Assurance, 2e, Hall &
Singleton
 Fraud auditors
 Forensic accountants
 Association of Certified Fraud Examiners
 Certified Fraud Examiner certification
 – http://www.acfe.org
Forensic Accounting
 Investigation
 Evidence for court
 Litigation
 CFE – Association of Certified Fraud
Examiners
 See newsletter sample at ACFE web site
IT Auditing & Assurance, 2e, Hall &
Singleton
Professor’s Note:
I have incorporated material from other
sources into this presentation to include
ethical issues.
IT Auditing & Assurance, 2e, Hall &
Singleton
Culture Helps Determine Laws
and Ethical Standards
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
27
Ethical Principles
• Golden rule: Do unto others as you would
have them do unto you
• Immanuel Kant’s categorical imperative:
If an action is not right for everyone to take,
then it is not right for anyone
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
28
Ethical Principles
• Descartes’ rule of change: If an action
cannot be taken repeatedly, then it is not right
to be taken at any time
• Utilitarian principle: Put values in rank
order and understand consequences of various
courses of action
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
29
Ethical Principles
• Risk aversion principle: Take the action
that produces the least harm or incurs the least
cost
• Ethical “no free lunch” rule: All tangible
and intangible objects are owned by creator
who wants compensation for the work
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
30
Information Rights: Privacy and
Freedom in the Internet Age
• Privacy: Claim of individuals to be left alone,
free from surveillance or interference from
other individuals, organizations, or the state
• Fair information practices: Set of
principles governing the collection and use of
information on the basis of U.S. and European
privacy laws
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
31
U.S. Federal Privacy Laws
General Federal Privacy Laws
•
•
•
•
Freedom of Information Act, 1968
Privacy Act of 1974
Electronic Communications Privacy Act of 1986
Computer Matching and Privacy Protection Act
of 1988
• Computer Security Act of 1987
• Federal Managers Financial Integrity Act of 1982
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
32
Communications with Children

Children’s Online Privacy Protection Act of
1998 (COPPA)
◦ Provides restrictions on data collection that must be
followed by electronic commerce sites aimed at
children
◦ Requires schools that receive federal funds to
install filtering software on computers
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
33
Sanrio’s Approach to COPPA
Compliance
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
34
Ethical Issues (continued)

Principles for handling customer data
◦ Use data collected to provide improved customer
service
◦ Do not share customer data with others outside
your company without the customer’s permission
◦ Tell customers what data you are collecting and
what you are doing with it
◦ Give customers the right to have you delete any of
the data you have collected about them
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
35
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
36
Ethical Issues


Under what conditions should the privacy of
others be invaded?
What legitimaizes intruding into others’ lives
through unobtrusive surveillance, through
market research, or by whatever means?
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
37
Ethical Issues


Do we have to inform people that we are
eavesdropping?
Do we have to inform people that we are
using credit history information for
employment screening purposes?
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
38
Property Rights: Intellectual
Property


Chapter 15
Intellectual property: Intangible creations
protected by law
Trade secret: Intellectual work or product
belonging to business, not in public domain
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
39
Property Rights: Intellectual
Property


Chapter 15
Copyright: Statutory grant protecting
intellectual property from getting copied for
28 years
Patents: Legal document granting the owner
an exclusive monopoly on the ideas behind an
invention for 20 years
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
40
Web Site Content Issues

Fair use of a copyrighted work
◦ Includes copying it for use in criticism,
comment, news reporting, teaching, or research

Vicarious copyright infringement
◦ Entity becomes liable if
 It is capable of supervising infringing activity
 Obtains financial benefit from infringing activity
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
41
Domain Names,
Cybersquatting, and Name
Stealing (continued)

U.S. Anticybersquatting Consumer Protection
Act (ACPA)
◦ Protects trademarked names from being registered
as domain names by other parties
◦ Parties found guilty of cybersquatting can be held
liable for damages of up to $100,000 per
trademark
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
42
Defamation

Defamatory statement
◦ Statement that is false and injures the reputation of
another person or company

Product disparagement
◦ If a defamatory statement injures the reputation of
a product or service instead of a person

Per se defamation
◦ Court deems some types of statements to be so
negative that injury is assumed
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
43
Deceptive Trade Practices

Federal Trade Commission
◦ Regulates advertising in the United States
◦ Publishes regulations and investigates claims of
false advertising
◦ Provides policy statements
◦ Policies cover specific areas such as
 Bait advertising
 Consumer lending and leasing
 Endorsements and testimonials
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
44
Federal Statutes Related to
Cybercrimes
18 U.S.C. 1029 Fraud and Related Activity in
Connection with Access
Devices
18 U.S.C. 1030 Fraud and Related Activity in
Connection with Computers
18 U.S.C. 2701 Unlawful Access to Stored
Communications
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
45
USA Patriot Act of 2001


The USA Patriot Act has strengthened U.S.
cyber laws and expanded cybercrime
definitions.
Under the Act, an activity covered by the law
is considered a crime if it causes a loss
exceeding $5,000, impairment of medical
records, harm to a person, or threat to public
safety.
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
46
USA Patriot Act of 2001


Chapter 15
Amendments made by the Act make it
easier for an Internet service provider (ISP)
to make disclosures about unlawful
customer actions without the threat of civil
liability to the ISP.
Another revision made by the Act provides
that victims of hackers can request law
enforcement help in monitoring
trespassers on their computer systems.
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
47
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
48
Chapter 15
IT Auditing & Assurance, 2e, Hall &
Forensic and Investigative Accounting
Singleton
49


Controlling the Assault of Non-Solicited
Pornography and Marketing Act
Establishes requirements for those who send
commercial email, spells out penalties for
spammers and companies whose products
are advertised in spam if they violate the law,
and gives consumers the right to ask emailers
to stop spamming them.
IT Auditing & Assurance, 2e, Hall &
Singleton





It bans false or misleading header
information.
It prohibits deceptive subject lines.
It requires that your email give recipients an
opt-out method.
It requires that commercial email be
identified as an advertisement and include
the sender's valid physical postal address.
Report Violations to 1-877-FTC-HELP
IT Auditing & Assurance, 2e, Hall &
Singleton
IT Auditing & Assurance,
2e, Hall & Singleton
IT Auditing & Assurance, 2e, Hall &
Singleton