Ethical Disillusion Paper

The definition of key terms that follow are commonly used terms by accounting professionals and experts in the accounting industry that are not commonly known, used, and/or understood by the general populace. Some of the following definitions used by the accounting industry, in particular auditors, hold different meanings and thus are clarified below, as related to their application in this study.

Collusion. Collusion is a group of individuals who perpetrate financial statement fraud. Groups may consist of a few individuals (e.g., CEO and CFO), several individuals (e.g., CEO and accounting department) or, the entire organization. In some cases, collusion may include external influence (e.g., a vendor). However, a member of top management

within the organization usually leads collusion in financial statement fraud (Anand et al., 2015).
Earnings management.

Earnings management occurs when a manager, or managers, use his or her judgment, in financial reporting, to alter the company’s financial reports. The manager purposefully structures the transaction(s) to favorably alter the financial statements and mislead stakeholders about the company’s economic performance or, to influence contractual outcomes, which depend on the reported accounting numbers (Brown, 2015).

Ethical leadership. Van Gils et al. (2015) defined ethical leadership as a process that emulates appropriate leader behavior and in return transfers such ethical behavior onward to followers through social learning, reinforcement, and communication of moral cues.

Fraud. For the purposes of Generally Accepted Auditing Standards (GAAS), fraud is the intentional act of deception that results in falsification and misrepresentation of an entity’s financial statements (SAS 122, 2012; Anand et al., 2015; Galletta, 2015).

Fraud triangle. The fraud triangle is a theoretical framework embedded in the psychology based on Cressey’s original work on the fraud theory. Accounting professionals use the fraud triangle to visualize the three components of the fraud theory, as well as to envision how the three components link together (Dellaportas,

2013).
Fraud risk factors. Fraud risk factors are conditions or events that exist indicating an incentive or pressure to commit fraud, provide an opportunity to commit fraud, and/or an attitude or rationalization to justify the fraudulent act (SAS 122, 2012).
Organizational ethical culture. Organizational ethical culture is the informal internal control of the organization based on the organization’s common values, beliefs, and traditions (Eisenbeiss et al., 2015).
Red flag. Red flag is the common terminology used within the accounting industry to represent fraud risk factors as they apply to the three components of the fraud theory. Examples of fraud risk factors are weakened internal controls, decision making dominated by one person, ongoing concerns, down playing budget projections, and perceptions by auditors of client dishonesty (Gullkvist & Jokipii, 2013).
SAS No. 122 Section AU240. In 2012, SAS No. 122 Section AU240, more commonly known as SAS 122, superseded SAS No. 99 Section AU316 (SAS 99) and affected financial statement audits for periods ending on or after December 15, 2012. SAS 122 is a redraft of SAS 99 to make Generally Accepted Auditing Standards (GAAS) easier to read and understand, as well as to prepare for merging GAAS with International Auditing Standards (SAS 122, 2012).
Tone at the top. Tone at the top in the business and accounting profession refers to top management’s attitude that assists in creating and maintaining an ethical workplace culture (Warren, Peytcheva, & Gaspar, 2015).