University of Dayton

PHL 313

CHAPTER 4

Multiple-Choice Questions

1)According to Loomis, the wrongful booking of sales looks a lot like:

1. 1. Good bookkeeping
   2. The new financing
   3. “Old accounting”
   4. Outright fraud
   5. Innocent mistakes

2. One ethical question that PricewaterhouseCoopers encourages its employees to ask is:
   1. Is it legal?
   2. How would it look in the papers?
   3. Does it feel right?
   4. Can you sleep at night?
   5. All of the above

3. The accounting firm that did the (ethically and financially flawed) audits for Enron was:
   1. PricewaterhouseCoopers
   2. Arthur Andersen
   3. Deloitte and Touch
   4. Ernst and Young
   5. None of the above

4. When considering naïve or at-risk investors, Frederick and Hoffman believe that some

                            acts are justified.

1. 1. illegal
   2. immoral
   3. paternalistic
   4. savvy
   5. reckless

5. Information asymmetry refers to the fact either that all parties to a transaction do not possess the same information or that they:
   1. Do not have the same access to information
   2. Cannot make the same use of information
   3. Are not protected by the same laws of information
   4. Do not possess the same information technology
   5. Have misappropriated information

6. The fact that insiders have a strong incentive to keep their information to themselves is, Moore says, an objection to insider trading that is:
   1. Trivial
   2. Serious

1. 3. Weak
   4. Flawed
   5. Both (c) and (d)

7. Proponents of insider trading refer to it as a crime that is:
   1. Vicious
   2. Heinous
   3. Victimless
   4. Invisible
   5. Major

8. The dubious accounting practice of hiding reserves for unexpected problems is called putting money in:
   1. A cookie jar
   2. A sock
   3. A rat hole
   4. A squirrel nest
   5. Under the mattress

9. Partnoy tells the story of Victor Niederhoffer, a notorious trader in:
   1. Derivatives
   2. Stocks and bonds
   3. Real estate
   4. Foreign currency
   5. Mortgage-backed securities

10. Fund managers can hide risk from shareholders by the use of:
    1. Stocks and bonds
    2. Puts and calls
    3. Derivatives
    4. Mutual funds
    5. Rogue traders

11. Farrell claims that the “derivatives bubble” was fueled by key economic and political trends. Which of the following is NOT one of those trends?
    1. Sarbanes-Oxley increased corporate disclosures and government oversight.
    2. The Federal Reserve’s cheap money policies deflated the value of the U.S. dollar.
    3. War budgets burdened the U.S. Treasury and future entitlements programs.
    4. Trade deficits with China and others destroyed the value of the U.S. dollar.
    5. All of these were relevant trends.

12. Former employees of Arthur Andersen point to a number of reasons for the accounting firm’s downfall, NOT including:
    1. A willingness to bend the rules
    2. An idea that the good economy would never end
    3. Changes to accounting in the 1980s and 1990s

1. 4. Board members not providing appropriate oversight of management
   5. A different business model from that of other firms

13. In “The Running of the Hedgehogs,” Duff McDonald explains that hedge funds:
    1. Are unregulated investments
    2. Are relatively regulated investments
    3. Charge reasonable fees to average Americans
    4. Never make their investors any money
    5. Will return investors’ money any time they want

14. Over time, banking has changed in which way?
    1. There are now cashless interactions, in which money is moved directly between accounts.
    2. Banks now keep only a fraction of their capital on hand and lend out the rest.
    3. The link between money and precious metal has been broken.
    4. Both (a) and (c)
    5. All of (a), (b), and (c)

15. What was different about the old business model depicted in the movie It’s a Wonderful Life, according to Ferguson?
    1. There were social ties between lenders and borrowers.
    2. Businesses and banks were more honest.
    3. There were fewer investment opportunities then.
    4. S&Ls could invest in anything they liked, not just mortgages.
    5. People were more optimistic and trusted the market.

True/False Questions

1. Managing earnings means adjusting the company’s stated expenses and income to make the company’s finances look better than they are.

2. Some employees of Arthur Andersen said that the accounting profession as a whole has lost its place as the moral compass of the business world.

3. All investors are expert investors.

4. An advocate of market fairness will likely appeal to the concept of a “level playing field.”

5. Victims of fraud or abuse by financial services firms rarely have recourse to the courts.

6. All thinkers here agree that insider trading can never contribute to the health of the market.

7. Partnoy argues that once traders have lost $50 million or so, they tend to stop taking risks.

8. Farrell shows that derivatives are only a very small part of the global economy.

9. Hedge funds could never create systematic panic in the market.

10. Americans carry an increasing amount of consumer debt.

Fill-in-the-Blank Questions

1. The type of individual investor business ethicists tend to worry about is the

                            investor.

2. Fairness in financial markets is often expressed by the concept of a                                    

playing field.

3. A person who is entrusted to act in the interests of another (an “agent”) has a

                            duty to the other.

4. Moore offers two arguments against                               .

5. Aristotle argues that                               is the key to virtue and therefore to human happiness.

6. Employee investors are often unaware of the amount of employees to maintain a fund.

7. Many accounting scandals have their roots in the practice known as whereby companies try (sometimes illegally) to meet Wall Street expectations.

taken by

,

8. In addition to seeing their portfolios as themselves personified, hedge fund managers also think constantly of                                                     .

9. Farrell’s article states that a                                      bubble is driving the economy.

10. Newton and Schmidt point out that there is no statutory                                    of insider trading.