4a.What are “externalities” and how do they relate to Corporate Responsibility? (5 marks). 4b. What five improvements would you recommend to Global Reporting Initiative’s Sustainability Reporting Guidelines in order to make sustainability reporting relevant and credible? (15 marks – 3 marks each). (20) * Externalities refer to the ancillary effects, due to an economic or business transaction, that are borne by a third-party. * While they can be both negative and positive, Corporate Responsibility seeks to address the former. * These spillover effects have existed since time immemorial: industrial revolution has seen soot emanate into the air from factories. Other examples:
Five improvements: 1) Catch-all GRI guidelines doesn’t apply to all industries, thereby giving some industries a lower grade: create multiple GRI indices applicable to different industries. 2) Corporations should back up words with real numbers: materiality 3) Sustainability reporting generally lacks credibility: 2011 surveys done by Leeds university displays egregious omissions. GRI should perhaps start policing large corporations to enhance its credibility. 4) More disclosure and greater assurance when dealing with pollution 5) More outcome oriented (currently mostly action oriented)

5a. Why may financial audits fail? (10 marks – 2 each) 5b.What can the authorities, accounting profession, auditors, educators, and preparers do to reduce the possibility of future financial audit failures? (10 marks – 2 marks for authorities, 2 marks for accounting profession, 2 marks for auditors, 2 for educators, and 2 for preparers). (20)
Five reasons for audit failures: 1) The distinction between management and investors are being blurred. 2) Culture of large corporations and of accounting firms 3) The Big Four means competition among these accounting firms are immense and they become beholden to their clients’ whims and desires 4) Authorities/regulators let accounting firms off the hook 5) Business-world’s unfettered pursuit of profit: accounting profession very different from other well-known professions in this regard.
What can be done:
Authorities/regulators: punish accounting firms more severely, quickly, and often
Accounting profession: start taking these problems seriously lest credibility drives further down the tank. More support to whistle blowers.
Auditors: Be mindful of the distinction between who they serve; is it management or investors? Maintain independence and public trust. Educators: Whether or not ethical behaviour can be taught, is debatable. But they can shine light on the prevalence of such behaviours and the dire consequences of audit failures.
Preparers: Additional ethics training. While they never make a bad person “good”, constant reminder of the repercussion of audit failure may be enough to dissuade fraudulent reporting. When auditors’ objectivity is enforced, preparers would be more diligent and accurate.

6. Choose an audit failure and describe what happened. What are the reasons for audit failures? What are the best ways to reduce audit failures in the future? How did the Big 4 contribute to audit failures?

7. Do firms today act like IBM did in 1922-1941? Why or why not?
What did IBM do? (Donald, W. M., & James, C. S. (2008). IBM and germany 1922-1941. Organization Management Journal, 5(4), 208-213. doi: http://dx.doi.org/10.1057/omj.2008.25) * The above journal succinctly summarizes IBM’s moral transgressions. (cite it) * IBM (and its president Thomas Watson), it the pursuit of profit in its second largest market share, consistently did business with Nazi Germany even during Hitler’s oppressive schemes. * IBM’s German subsidiary – Dehomag – was contracted by the Nazi regime, which made use of IBM’s punch-card tabulated machines to facilitate its war against neighbouring countries, to keep track of “undesirable” portion of the German population, as well