Essentials of Abnormal PsychologyEighth EditionChapter 3

Essentials of Abnormal Psychology
Eighth Edition
Chapter 3
Clinical Assessment, Diagnosis and Research in
Psychopathology
© 2019 Cengage. All rights reserved.
1
Outline
Assessing Psychological Disorders
Diagnosing Psychological Disorders
Research in Psychopathology
Types of research methods
Genetic and Cultural Research
Research Ethics
Focus Questions

What are clinical assessment and diagnosis?
What are the basic components and methods of psychopathology
research?
How do researchers study the role of genetics?
How do researchers study behavior across time and culture?
Why are ethical principles important in research?
Assessing Psychological Disorders, Part 1
Purposes of clinical assessment
To understand the individual
To predict behavior
To plan treatment
To evaluate treatment outcome
Assessing Psychological Disorders, Part 2
Analogous to a funnel
Starts broad
Multidimensional in approach
Narrow to specific problem areas

Key Concepts in Assessment, Part 1
Reliability
Consistency in measurement
Examples include test-retest and inter-rater reliability
Validity
What an assessment measures and how well it does so
Examples include concurrent, discriminant, and predictive
validity
Reliability - degree to which a measure is consistent
Inter-rater reliability- consistency across two or more raters
(e.g., do different therapists watching the same video agree that
the patient is depressed?)
Test-retest reliability - consistency across time
Example of validity question: Are people who get higher scores
on a measure of anxiety actually more anxious?
Key Concepts in Assessment, Part 2
Standardization
Ensures consistency in the use of a technique
Provides population benchmarks for comparison
Examples include structured administration, scoring, and
evaluation procedures

Concepts That Determine the Value of Clinical Assessments
FIGURE 3.1 Concepts that determine the value of clinical
assessments.
FIGURE 3.1 Concepts that determine the value of clinical
assessments.
The Clinical Interview and Physical Exam, Part 1
Clinical interview
Most common clinical assessment method
Structured or semistructured
Example of semistructured interview: Anxiety Disorders
Interview Schedule for DSM-5 (ADIS-5) has modules pertaining
to anxiety, mood, and related disorders, designed to assess
DSM-5 criteria
Teaching tip: Some definitions.
Structured = you ask the exact same questions in the same order
Semi-structured (most common) Have an outline of questions
that are followed, but some flexibility to ask more or less about
certain areas depending on the needs of the interviewee

Clinical interviews may range from half an hour to 4+ hours
depending on the needs of the patient and the purpose of the
assessment. Longer assessments are necessary for some research
studies and when you are trying to get a complete psychological
history (e.g. previous diagnoses as well as current).
The Clinical Interview and Physical Exam, Part 2
Mental status exam
Appearance and behavior
Thought processes
Mood and affect
Intellectual functioning
Sensorium
Physical exam
“Sensorium” = the patient’s general orientation. E.g. do they
know where they are and what they’re doing?
Physical exams are often the “first pit stop” in assessing mental
health, because many patients visit a primary care physician
first. For example, a doctor might ascertain whether panic
attacks are the result of a heart or respiratory condition, or
whether depression could be due to the side effects of a
medication. Physical exams are not typically conducted in
outpatient clinics. They are more common in inpatient or
hospital settings, or in the case of mental illnesses that are
likely to affect physical functioning (e.g., substance use
disorders, eating disorders, somatic symptom disorders,
disorders in which a patient is taking meds with a lot of side
effects, e.g., schizophrenia).
Components of Mental Status Exam

Subsequent focus—possible existence of disorder characterized
by intrusive, unwanted thoughts, and resistance to them.Mental
Status ExamFrankAppearance and behavior
Over Behaviour
Attire
Appearance, posture, expressionsPersiste nt twitch
Appearance appropriate2. Thought
Rate of speech
Continuity of speech
Content of speechFlow and content of speech reasonable3.
Mood and affect
Predominant feeling state of the individual saysAnxious mood
Affect appropriate4. Intellectual functioning
Type of vocabulary
Use of abstractions and metaphorsIntelligence within normal
limits5. Sensorium
Awareness of surroundings in terms of person (self and
clinician), time, and place – “oriented times three”Oriented
times three
FIGURE 3.2 Components of the mental status exam.
Behavioral Assessment and Observation, Part 1
Behavioral assessment
Focus on the present—here and now
Direct observation of behavior-environment relations
Purpose is to identify problematic behaviors and situations
ABCs—identify antecedents, behaviors, and consequences

Behavioral Assessment and Observation, Part 2
Behavioral observation and behavioral assessment
Can be either formal or informal
Self-monitoring vs. being observed by others
Problem of reactivity using direct observation
Reactivity = when your behavior is being observed (by yourself
or someone else), it starts to change
ABCs of Observation
FIGURE 3.3 The ABCs of observation.
FIGURE 3.3 The ABCs of observation.
Psychological Testing: Projective Tests, Part 1
Psychological testing
Must be reliable and valid
Projective tests
Rooted in psychoanalytic tradition

Used to assess unconscious processes
Project aspects of personality onto ambiguous test stimuli
Require high degree of inference in scoring and interpretation
Technology Tip: This APA web site contains information and
useful links related to psychological testing, including the
ethics of testing. http://www.apa.org/science/testing.html
Psychological Testing: Projective Tests, Part 2
Examples
The Rorschach inkblot test; Thematic Apperception Test
Reliability and validity data tend to be mixed
TAT = You see an ambiguous picture and tell a story about it.
The idea of projective tests is that when you’re presented with
ambiguous stimuli, the way you interpret them says something
about your personality
Rorschach Inkblot
FIGURE 3.4 This inkblot resembles the ambiguous figures
presented in the Rorschach test.

FIGURE 3.4 This inkblot resembles the ambiguous figures
presented in the Rorschach test.
Objective Tests and Personality Tests
Objective tests
Roots in empirical tradition
Test stimuli are less ambiguous
Require minimal clinical inference in scoring and interpretation
Personality tests
Minnesota multiphasic personality inventory (MMPI)
Extensive reliability, validity, and normative database
Technology Tip: Visit Dr. James Butcher’s MMPI Research
Project website at the University of Minnesota for more
information about the MMPI and its various incarnations:
http://www1.umn.edu/mmpi/
Ch. 3 of the textbook has an extensive and interesting
discussion of the MMPI.
Psychological Testing and Objective Tests
Intelligence tests
Nature of intellectual functioning and IQ
Originally developed as a measure of degree to which children’s
performance diverged from others in their grade
The deviation IQ
Compare a person’s scores against those of other people who
are of the same age

Verbal and performance domains
Technology Tip: A site containing historical information related
to intelligence testing: http://www.intelltheory.com/
Neuropsychological Testing, Part 1
Purpose and goals
Assess broad range of skills and abilities
Goal is to understand brain-behavior relations
Examples
The Luria-Nebraska and Halstead-Reitan batteries
Designed to assess for brain damage
Test diverse skills ranging from grip strength to sound
recognition, attention, concentration
Technology Tip: This site contains information and links about
neuropsychology and neuropsychological assessment:
http://www.neuropsychologycentral.com/index.html
Neuropsychological Testing, Part 2
Problems with neuropsychological tests
False positives: Mistakenly shows a problem where there is
none
False negatives: Fails to detect a problem that is present

Neuroimaging and Brain Structure, Part 1
Neuroimaging: pictures of the brain
Two objectives
Understand brain structure
Understand brain function
Technology Tip: This site contains a series of excellent links to
resources related to neuroimaging, neuroanatomy, and their
relation to psychopathology:
http://www.neuropsychologycentral.com/interface/content/links/
page_material/imaging/imaging_links.html#a
Neuroimaging and Brain Structure, Part 2
Imaging brain structure
Computerized axial tomography (CAT or
CT scan)
Utilizes X-rays
Magnetic resonance imaging (MRI)
Utilizes strong magnetic fields
Better resolution than CT scan

Neuroimaging and Brain Function
Imaging brain function
Positron emission tomography (PET)
Single photon emission computed tomography (SPECT)
Both involve injection of radioactive isotopes
Isotopes react with oxygen, blood, and glucose in the brain
Functional MRI (fMRI)—brief changes in brain activity
Psychophysiological Assessment, Part 1
Psychophysiological assessment
Assess brain structure, function, and activity of the nervous
system
Psychophysiological assessment domains
Electroencephalogram (EEG)—brain wave activity.
ERP—Event-related potentials = brain response to a specific
experience (e.g., hearing a tone)
Heart rate and respiration—cardiorespiratory activity
Electrodermal response and levels—sweat gland activity
EEG = Electroencephalogram
Alpha waves – awake, resting patterns
Delta waves – asleep, relaxed patterns
Panic attacks – delta wave activity during wakefulness may
indicate localized dysfunction

Psychophysiological Assessment, Part 2
Uses of routine psychophysiological assessment
Disorders involving a strong physiological component
Examples
PTSD, sexual dysfunctions, sleep disorders
Headache and hypertension
Diagnosing Psychological Disorders: Foundations in
Classification, Part 1
Diagnostic classification
Classification is central to all sciences
Assignment to categories based on shared attributes or relations
Idiographic strategy
What is unique about an individual’s personality, cultural
background, or circumstances
Nomothetic strategy
Often used when identifying a specific psychological disorder,
to make a diagnosis

Idiographic – determination of individual, unique features or
attributes
Nomothetic – determination of general classes and common
attributes – involves the study of large groups with shared
features
Terminology of classification systems
Taxonomy—classification in a scientific context
Nosology—taxonomy in psychological/medical phenomena
Nomenclature—labels in a nosological system (e.g., “panic
disorder” “depressive disorders”)
Taxonomy – Classification in a scientific context
Nosology – Taxonomy in psychological / medical contexts
Nomenclature – Nosological labels (e.g., panic disorder)
Issues with Classifying and Diagnosing Psychological
Disorders, Part 1
Categorical and dimensional approaches
Classical (or pure) categorical approach—strict categories (e.g.,
you either have social anxiety disorder or you don’t)
Dimensional approach—classification along dimensions (e.g.,
different people have varying amounts of anxiety in social

situations)
Prototypical approach—combines classical and dimensional
views
Prototypical approach - categorical approach that combines
features of the other approaches. Identifies essential features of
a psychological disorder so that it can be classified, but allows
for nonessential variations that do not necessarily change the
classification (e.g., there are several ways one could meet
criteria for major depression or panic disorder, but still get the
diagnosis). The DSM-5 is based on this approach.
Issues with Classifying and Diagnosing Psychological
Disorders, Part 2
Widely used classification systems
Diagnostic and Statistical Manual of Mental Disorders (DSM)
Updated every 10–20 years
Current edition (released May 2013): DSM-5
Previous edition called DSM-IV-TR
ICD-10
International Classification of Diseases (ICD-10)
Published by the World Health Organization (WHO)
History of the DSM, Part 1

Prior to 1980, diagnoses were made based on biological or
psychoanalytic theory
Introduction of DSM-III in 1980 revolutionized classification
Classification newly relied on specific lists of symptoms,
improving reliability and validity
Diagnoses classified along five “axes” describing types of
problems (e.g., disorder categories, health problems, life
stressors)
Previously, psychopathology was categorized along five axes.
Axis I = Clinical syndromes (most psychological disorders).
Axis II = personality disorders and mental retardation (more
pervasive), Axis III = relevant medical conditions. Axis IV =
Relevant life stressors. Axis V = Global assessment of
functioning (0-100 rating). DSM-5 no longer uses the axis
system. This information is still taken into account by
clinicians, but it’s not discussed in terms of axes.
History of the DSM, Part 2
DSM-IV introduced in 1994
Eliminated previous distinction between psychological vs.
organic mental disorders
Reflected appreciation that all disorders are influenced by both
psychological and biological factors
DSM-IV-TR (“text revision” of DSM-IV) incorporated new
research and slightly altered criteria accordingly

The DSM-5
Basic characteristics
Removed axial system
Clear inclusion and exclusion criteria for disorders
Disorders are categorized under broad headings
Empirically grounded, prototypic approach to classification
DSM-5 represented some changes to classification. One major
change is that the Axis system used in DSM-IV-TR was
eliminated.
For a detailed outline of all changes in DSM-5, see Boettcher et
al. 2013 – A Student’s Guide to Important Changes in DSM-5,
part of the instructor resources for Barlow/Durand Abnormal
Psychology and Durand/Barlow Essentials of Abnormal
Psychology.
Unresolved Issues in DSM-5, Part 1
The problem of comorbidity
Defined as two or more disorders for the same person
High comorbidity is extremely common
Emphasizes reliability, maybe at the expense of validity (i.e.,
may artificially “split” diagnoses that are very similar)

Discussion Tip: Have students discuss how these problems have
changed over time and across diagnoses. Are there differences
within this culture in terms of demographic factors (i.e., SES,
ethnicity, geography, age)?
Unresolved Issues in DSM-5, Part 2
Dimensional classification
DSM was intended to move toward a more dimensional
approach, but critics say it does not improve much from DSM-
IV
Labeling issues and stigmatization
Some labels have negative connotations and may make patients
less likely to seek treatment
Discussion Tip: Have students discuss how these problems have
changed over time and across diagnoses. Are there differences
within this culture in terms of demographic factors (i.e., SES,
ethnicity, geography, age)?
Summary of Clinical Assessment and Diagnosis
Clinical assessment and diagnosis
Aims to fully understand the client
Aids in understanding and ameliorating human suffering
Based on reliable, valid, and standardized information

Conducting Research in Psychopathology
Questions driving a science of psychopathology
What problems cause distress or impair functioning?
Why do people behave in unusual ways?
How can we help people behave in more adaptive ways?
Basic Components of Research, Part 1
Starts with a hypothesis or “educated guess”
Not all hypotheses are testable
Hypotheses in science are formulated so that they are testable
Basic Components of Research, Part 2
Research design
A method to test hypotheses
Independent variable
The variable that causes or influences behavior
Dependent variable
The behavior influenced by the independent variable

Independent variable – The variable that causes or influences
behavior
Dependent variable – The change influenced by the independent
variable
Considerations in Research Design
Internal validity vs. external validity
Internal validity: Extent to which results of a study are due to
the independent variable
External validity: Extent to which results of a study are
generalizable to the population it’s studying
Ways to increase internal validity by minimizing confounds
Use of control groups
Use of random assignment procedures
Use of analog models
Control group: A comparison group of similar composition that
is usually not manipulated in the same way as the group under
study, or they are “healthy/normal”
EXAMPLES: In a study of anxiety treatment, compare anxious
patients who are treated with anxious patients who do NOT
receive treatment.
In a study of information processing, compare the performance
of people who are depressed with the performance of people
who are NOT depressed.
Analog model: Recreating the phenomenon under study in
laboratory conditions

Statistical versus Clinical Significance, Part 1
Statistical methods—branch of mathematics
Helps to protect against biases in evaluating data
Statistical vs. clinical significance
Statistical significance—are results due to chance?
Clinical significance—are results clinically meaningful?
Statistical significance does not imply clinical meaningfulness
Statistical significance = a result is unlikely to have occurred by
chance.
Clinical significance = a result actually matters.
These are not always the same thing. When you have a really
big sample size, you can achieve statistical significance if there
is a small but consistent result across the whole group. But for
any individual in that group, it might be a pretty meaningless
result.
For example, take a group of 1000 insomniacs. If a new
intervention helped all of them sleep an additional 10 minutes
per night, that would probably be statistically significant. But
for any one of them, the difference between 5 hours of sleep and
5 hours + 10 minutes of sleep will not make much of an impact
on their functioning (i.e., not clinically significant).
Technology Tip: This site contains several links to

pseudoscientific issues in psychology, and abnormal psychology
in particular.
http://www.psychology.org/links/Resources/Pseudoscience/
Statistical versus Clinical Significance, Part 2
Balancing statistical versus clinical significance
Evaluate effect size
Evaluate social validity
Patient uniformity myth
Researchers sometimes mistakenly see all participants as one
homogenous group
Generalizability
The extent to which results are applicable to the larger
population being studied
Studying Individual Cases
Case study method
Extensive observation and detailed description of a client
Foundation of early historic developments in psychopathology
Limitations
Lacks scientific rigor and suitable controls
Internal validity is typically weak
Often entails numerous confounds

Teaching Tip: Present a case study from the video library or
your own clinical experience.
Research by Correlation, Part 1
Assess the degree to which levels of certain variables are linked
to levels of other variables
Example: Higher levels of education are linked to higher levels
of income
The nature of correlation
Statistical relation between two or more variables
No independent variable is manipulated
Range from –1.0 to 0 to +1.0
Negative vs. positive correlation
Discussion Tip: Have students generate situations in which a
correlational design is necessary and cannot be avoided due to
natural or ethical constraints.
Research by Correlation, Part 2
Necessary in situations where you can’t manipulate variables
Limitations
Does not imply causation
Problem of directionality
Epidemiological research—an example of the correlational
method
Incidence, prevalence, and course of disorders
Examples are AIDS, trauma following disaster

Correlations
Figure 3.6
FIGURE 3.6 These three graphs represent hypothetical
correlations between age and sleep problems.
Research by Experiment, Part 1
Nature of experimental research
Manipulation of independent variables
Attempt to establish causal relations
Group experimental designs
Control groups
Placebo: Some participants are given an inactive treatment (e.g.,
sugar pill), but participants don’t know which treatment they
are getting
Double-blind: Participants and assessors are unaware of what
kind of treatment participants are getting

Research by Experiment, Part 2
Comparative treatment designs
Type of group design
Compare different forms of treatment in similar persons
Addresses treatment process and outcome
Single-Case Experimental Designs, Part 1
Nature of single subject design
Rigorous study of single cases
Varied experimental conditions and time
Repeated measurement
Evaluation of variability, level, and trend
Premium on internal validity
Single-Case Experimental Designs, Part 2
Types of single-subject design
Withdrawal designs
Stop treatment to see if behavior/symptoms return to the way
they were before treatment
Multiple baseline designs
Start treatment at different times in different conditions (e.g., in
home vs. school settings)—see if changes occur in conjunction
with introduction of treatment

Single-Case Experimental Design
Figure 3.7
Example of what we can learn from single-case experimental
research
FIGURE 3.7 The top graph seems to show Wendy’s anxiety
dropping significantly after treatment (measuring level).
However, when you look at repeated measures before and after
treatment, the middle graph reveals little change because her
anxiety fluctuated a great deal (measuring variability). A
different scenario is illustrated in the bottom graph (measuring
trend), where her anxiety also varied. In general, there was a
downward movement (improved anxiety) even before treatment,
suggesting that she might have improved without help.
Examining variability and trend can provide more information
about the true nature of the change.
Multiple Baseline Design
Figure 3.8

FIGURE 3.8 This figure shows how a multiple baseline design
was used to illustrate that the treatment—functional
communication training—was responsible for improvements in
the children’s behaviors. The circles represent how often each
child exhibited behavior problems (called challenging
behavior), and the blue-shaded areas show how often they
communicated without help from the teacher (referred to as
unprompted communication). (From Durand, V. M., 1999.
Functional communication training using assistive devices:
recruiting natural communities of reinforcement, Journal of
Applied Behavior Analysis, 32(3), 247–267. Reprinted by
permission of the Society for the Experimental Analysis of
Human Behavior.)
Genetic Research Strategies, Part 1
Behavioral genetics
Interaction between genes, experience, and behavior
Phenotype vs. genotype
Genotype: Genetic makeup
Phenotype: Observable characteristics (e.g., eye color, degree of
shyness)

Genetic Research Strategies, Part 2
Strategies used in genetic research
Family studies—behaviors/emotional traits in family members
Adoptee studies—separate environmental from genetic factors
Twin studies—psychopathology in fraternal vs. identical twins
Genetic linkage and association studies—sites of defective
genes
Technology Tip: The Online Mendelian Inheritance in Man
database is a catalog of human genes and genetic disorders
authored and edited by Dr. Victor A. McKusick and colleagues
at Hopkins
(http://www.ncbi.nlm.nih.gov/sites/entrez?db=OMIM).
Studying Behavior over Time, Part 1
Rationale and overview
How does the problem or behavior change over time?
Important in prevention and treatment research
Studying Behavior over Time, Part 2
Time-based research strategies
Cross-sectional designs and the cohort effect
Longitudinal designs and the
cross-generational effect
Sequential designs—combine both strategies
Assets and liabilities of time-based research strategies

Cohort effect: Systematic differences in participants may simply
be due to their age group. E.g. kids growing up during the AIDS
crisis probably have unique opinions about STIs. (This isn’t
because they’re in their 30s and 40s but rather because they
heard about serious STIs as children)
Cross-generational effect - trying to generalize findings to
groups whose experiences are very different from those of the
study participants.
Research Design
Figure 3.9
FIGURE 3.9 Two research designs, longitudinal & cross-
sectional: Same people followed across time; people of different
ages viewed at the same time.
Studying Behavior across Cultures
Value of cross-cultural research
Overcoming ethnocentric research
Assets and liabilities of cross-cultural research

Assets
To clarify how psychopathology manifests in different ethnic
groups
Problems with cross-cultural research
Limited by available measures
Programs of Research
Components of a research program
Set of interrelated research questions
Draw on several methodologies in finding answers
Conducted in stages, often involving replication
Allows for more nuanced, complete picture of a phenomenon
Replication is critical
Protects against fluke results
Research Ethics, Part 1
Institutional review boards (IRBs) & the APA ethics code
Oversee the rights of human subjects participating in research
Make sure research and data are handled responsibly

Technology Tip: This is the online version of the American
Psychological Association’s Ethical Principles of Psychologists
and Code of Conduct. http://www.apa.org/ethics/code.html
Research Ethics, Part 2
Ethical principals
Informed consent—historical evolution post-WWII
Competence—ability to provide consent
Voluntarism—lack of coercion
Full information—necessary information to make an informed
decision
Comprehension—understanding about benefits and risks of
participation
Summary of Research Methods, Part 1
Nature of research
Establishing and testing hypotheses
Research design
Varies depending on the questions posed
Each has unique benefits and drawbacks

Abnormal psychology is founded in the scientific method
Understand the nature of abnormality and human suffering
Understand the causes of psychological disorders
Understand the course of psychological disorders
Understand how to prevent and treat psychological disorders
Replication is the cornerstone of science and programmatic
research
Research must occur in the context of ethical considerations and
values
This final week’s topics are:
· Strategic accounting issues in MNCs
· International auditing and corporate governance
· International corporate social reporting
What follows are my lecture notes and links for you to further
your knowledge of these key topics in International Accounting.

I STRATEGIC ACCOUNTING ISSUES IN MNC’s
Strategy by definition is
a carefully devised plan of action to achieve a goal, or the art of
developing or carrying out such a plan; a business plan.
(Encarata Dictionary)
Strategic Planning involves the following:
· Short- and long-term goals
· Objectives for the organization
· Action(s) to be taken
· Resources that will be needed
Accounting plays a huge role in strategic planning by providing
quantitative information on…
· SWOT
· Strengths
· Weaknesses
· Opportunities
· Threats
· Costs and benefits needed for decisions on
· Capital budgeting, and
· Long-term investments
Capital Budgeting decisions as to whether or not to make a
capital investment. Techniques used include:
· Payback Period
· Return on Investment (ROI)
· Discounted Cash Flow
· Net Present Value (NPV)
· Internal Rate of Return (IRR)
CAPITAL INVESTMENT TECHNIQUES:
Technique Definition

Computation
Payback period
Number of years to recover the initial investment
Number of years for the cumulative cash flow to equal the
investment
Book rate of ROI (return on investment)
Rate of average annual net income to the initial investment or
average investment (book value)
Average net income investment book value
NPV (net present value)
Difference between the initial investment and the present value
of subsequent net cash inflows discounted at a given interest
rate
Present value of net cash inflows──initial investment
IRR (internal rate of return)
Discount rate that makes the initial investment equal the present
value of the subsequent net cash inflows
Solving the following equation for discount rate i:
(present value factor of i) Net cash inflows - initial investment
Use of a balanced score card approach is also valuable in
strategic planning…for a better understanding of this
technique…
http://balancedscorecard.org/Resources/About-the-Balanced-
Scorecard
Source: Balance Scorecard Institute
And last but not least, the key to success in strategic planning is
an awareness and sensitivity to the national cultures.
II INTERNATIONAL AUDITING & CORPORATE
GOVERNANCE

Auditing is an integral part of multinational corporate
governance.
Auditing is expected to improve the precision, quality and
reliability of information made available to the market, and to
enhance investor confidence in such information.
With the current trend toward globalization of markets, and
rapid growth in international transactions, securing investor
confidence is crucial for MNCs.
The Organization for Economic Cooperation and Development’s
(OECD) revised code of corporate governance emphasizes
among other things, that auditors should be accountable to
shareholders, and that boards of directors should effectively
oversee the financial reporting function.
For detailed information on this topic…
https://www.oecd.org/daf/ca/Corporate-Governance-
Factbook.pdf
For a simpler definition from Investopedia.com
The system of rules, practices and processes by which a
company is directed and controlled. Corporate governance
essentially involves balancing the interests of the many
stakeholders in a company - these include its shareholders,
management, customers, suppliers, financiers, government and
the community. Since corporate governance also provides the
framework for attaining a company's objectives, it encompasses
practically every sphere of management, from action plans and

internal controls to performance measurement and corporate
disclosure.
Corporate governance became a pressing issue following the
2002 introduction of the Sarbanes-Oxley Act in the U.S., which
was ushered in to restore public confidence in companies and
markets after accounting fraud bankrupted high-profile
companies such as Enron and WorldCom.
Most companies strive to have a high level of corporate
governance. These days, it is not enough for a company to
merely be profitable; it also needs to demonstrate good
corporate citizenship through environmental awareness, ethical
behavior and sound corporate governance practices.
Some of the specific measures introduced by the Sarbanes-
Oxley Act to improve corporate governance relate directly to
auditing, for example, establishment of a new oversight board
for the accountancy profession, tightly defining ‘independence’
of audit committee members, requiring external auditors to
report directly to audit committee, and prohibition of certain
non-audit services by external auditors.
On the following page is a brief summary of the Sarbanes-Oxley
Act of 2002. Please take the time to read it.
Sarbanes-Oxley Act of 2002
Fondly known as SOX, the bill was enacted into law on July 30,
2002. It is also known as the Public Company Accounting
Reform and Investor Protection Act of 2002. It is one of the
most controversial laws passed in response to a number of major

corporate and accounting scandals; i.e., WorldCom, Enron,
Tyco, etc. As a result of the scandals, public trust in
accounting and reporting practices was badly shaken.
This law was named after its sponsors and actually came into
existence as a result of two bills presented to Congress.
In April 25, 2002, the House passed Republican Michael Garver
Oxley’s bill. It was referred to as the Corporate and Auditing
Accountability, Responsibility and Transparency Act. It had
the support of President George W. Bush and the Security &
Exchange Commission (SEC).
At the same time in the Senate, Democrat Paul Sarbanes was
working on his proposal, Senate Bill 2673. This bill passed the
Senate Banking Committee on June 18, 2002; seven days prior
to the WorldCom scandal revealing that their earnings had been
overstated by more than $72 billion during the last year and a
quarter as a result of improper accounting. The full Senate
approved Bill 2673 on July 15, 2002 by a vote of 97-0.
A Conference Committee was formed to reconcile the
differences between the Senate (Sarbane’s S2673) and the
House (Oxley’s H3763) bills. A conference committee is a
Congressional committee appointed by the House and Senate in
order to resolve disagreements on a particular bill. In this case,
the goal was to combine two bills that had similar prescriptions.
SOX was obviously named after its two sponsors, Paul Sarbanes
(D-MD) and Michael G Oxley (R-OH). The Act was approved
by an overwhelming majority in both the House and the Senate
and on July 30,2002 was signed by President George W. Bush
into law. President Bush stated that the law included “the most
far-reaching reforms of American business practices since the
time of Franklin D. Roosevelt.” (Elisabeth Bumiller: "Bush
Signs Bill Aimed at Fraud in Corporations", The New York

Times, July 31, 2002, page A1).
(A little-known fact is that the bill that was signed into law
contained very little, if any, of Mike Oxley's Bill. They kept
his name on the bill more for political leverage within the
House. )
The legislation covers a broad range and creates new and higher
standards for all United States public company boards,
management and public accounting firms. The Act contains 11
sections and requires the SEC to implement rulings on
requirements to comply with this new law.
This law was far reaching and had international impact.
Reference
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=474142
for additional readings simply Google SOX and you will find a
myriad of articles.
There are major variations in many aspects of external auditing
across countries, including the purpose of external auditing, the
audit environment, regulation of auditing, and audit reports.
The International Auditing and Assurance Standards Board
(IAASB) is part of the International Federation of Accountants
(IFAC). IFAC is responsible for international auditing
standards. There are 36 international standards on auditing
(ISAs)

International Auditing Standard 1 (IAS 1), which governs the
presentation of financial statements.
IAS 1 Presentation of Financial Statements sets out the overall
requirements for financial statements, including how they
should be structured, the minimum requirements for their
content and overriding concepts such as going concern, the
accrual basis of accounting and the current/non-current
distinction. The standard requires a complete set of financial
statements to comprise a statement of financial position, a
statement of profit or loss and other comprehensive income, a
statement of changes in equity and a statement of cash flows.
IAS 1 was reissued in September 2007 and applies to annual
periods beginning on or after 1 January 2009.
Source: Deloitte website
The International Federation of Accountants’ website is
www.ifac.org
III INTERNATIONAL CORPORATE SOCIAL REPORTING
In the past the focus was strictly on the economic aspects in
external reporting. Today we are combining the economic
aspects and integrating them with social and governance.
CRS – Corporate Social Reporting as defined in
Investopedia.com
Corporate initiative to assess and take responsibility for the
company's effects on the environment and impact on social

welfare. The term generally applies to company efforts that go
beyond what may be required by regulators or environmental
protection groups.
Corporate social responsibility may also be referred to as
"corporate citizenship" and can involve incurring short-term
costs that do not provide an immediate financial benefit to the
company, but instead promote positive social and environmental
change.
Also included in this week’s discussion is a PowerPoint
presentation from John Wiley & Sons on the topic of CRS.
After you’ve had a chance to view the PowerPoint, go to the
following KPMG website. It provides the current global trends
in corporate responsibility reporting with a very interesting
interactive tool that allows you to compare countries.
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPub
lications/corporate-responsibility/Pages/default.aspx
Also please see the following notes for additional information
on CSR.
OUR CHANGING WORLD AND THE EVOLUTION
OF
CORPORATE SOCIAL RESPONSIBILITY (CSR)
The Importance of CSR
· It is slowly becoming mainstream
· It discusses the role of business in society
· It is the pathway for businesses to become responsible and
ethical…essentials for our future world
· And in return, CSR contributes to positive outcomes for
companies and their stakeholders.
CSR Defined and Debated

According to the Financial Times the definition of corporate
social responsibility is
a business approach that contributes to sustainable development
by delivering economic, social and environmental benefits for
all stakeholders.
CSR is a concept with many definitions and practices. The way
it is understood and implemented differs greatly for each
company and country. Moreover, CSR is a very broad concept
that addresses many and various topics such as human rights,
corporate governance, health and safety, environmental effects,
working conditions and contribution to economic development.
Whatever the definition is, the purpose of CSR is to drive
change towards sustainability.
Unilever is a multinational corporation, in the food and
beverage section with a comprehensive CSR strategy.
Here are three definitions of CSR and one for strategic CSR:
1. 1979 Archie Carroll claimed, “CSR encompasses the
economic, legal, ethical and philanthropic expectations that
society has of organizations at a given point in time” (Carroll,
1979: 500).
2. 1984 Edward Freeman brought the term ‘stakeholders’ into
this discourse and the approach according to which a corporate
has a role in society and that it is larger than just pursuing
profit. According to the stakeholder theory, CSR can be defined
as “a view of the corporation and its role in society that
assumes a responsibility among firms to pursue goals in
addition to profit maximization and a responsibility of the
stakeholders to hold the firm responsible for its actions”
(Werther and Chandler, 2011: 5).

3. 2003 Aaronson defines CSR as “business decision-making
linked to ethical values, compliance with legal requirements,
and respect for people, communities, and the environment
around the world.”
4. 2011 Werther and Chandler defined strategic CSR as “the
incorporation of a holistic CSR perspective within a firm’s
strategic planning and core operations so that the firm is
managed in the interest of a broad set of stakeholders to achieve
maximum economic and social value over the medium to long
term.”
Source: Strategic Corporate Social Responsibility, Debbie
Haski-Leventhal, 2018, Sage Publications
Alternative concepts and terms to CSR:
· Sustainability
· Corporate responsibility
· Corporate citizenship
· Social business or enterprise
· Conscious business
· Creating shared value
Brief History of CSR
1759 Time permitting, read Adam Smith’s, The Theory of Moral
Sentiments or at least check out the Adam Smith Institute at
www.adamsmith.org On this website you can get a summary of
the main themes of the book.
1940 Smith’s approach was strengthened by Elton Mayo’s
Hawthorn study. The focus was on the productivity of workers
in an electric factory.
1953 Howard Bowen published Social Responsibilities of the
Businessman. It was the first time
someone had written specifically on CSR and it is viewed as the

modern-era CSR.
1970 Milton Friedman argued that the only social responsibility
of a company was to make as much money for its stockholders
as possible. CSR, unless used as a means to make more profit, is
immoral.
Please note there is a difference between stockholders or
shareholders vs stakeholders
1971 the Committee for Economic Development (CED)
published the Social Responsibilities of Business Corporations.
CED observed that business functions by public consent, and its
basic purpose is to serve constructively the needs of society to
the satisfaction of society. As such, the social contract between
business and society was changing substantially and business
was expected to assume broader responsibilities to society.
Furthermore, the CED noted that business assumes a role in
contributing to the quality of life and that this role is more than
just providing goods and services.
1979 Archie Carroll argued that, in addition to financial
responsibility, companies also have a legal responsibility (to
obey the law and regulations), an ethical responsibility (to do
what is right, fair and just) and a philanthropic or discretionary
responsibility (to be a good corporate citizen, give back to the
community).
1984 another leap forward when Edward Freeman developed the
stakeholder theory and argued that companies are not only
accountable to their shareholders but to a broad set of
stakeholders. As such, stakeholders include employees,
consumers, governments, the community in which the company
operates and even the environment. This was another attempt to
broaden the responsibility of business from financial alone, to
social and environmental as well.

2002 Porter and Kramer published an article in Harvard
Business Review (HBR) arguing that companies that are not
good for society would not be able to maintain their competitive
advantage in the future.
Business Responsibilities
Narrow view
· Businesses exists to produce products and services, sell them
and maximize profit.
Broad view
· Businesses have additional responsibilities to making a profit.
Business operates within society and only thrives because of
people who are employees, consumers and even shareholders.
As such, business has an enormous responsibility to ensure the
well-being of people and to avoid harm.
Drivers for Change
· Successful responsibility companies
· For an excellent read consider The World is Flat by Thomas
Friedman (2005)
· Consumer growing awareness
· Globalization and free flow of information
· Financial crises and the results of unethical business
Business Motivation for CSR
The motivation is divided into three groups:
1. Moral
a. It is the right thing to do
b. Society makes business possible and companies have a
reciprocal obligation

c. Social license to operate
2. Relational
a. Relationships with stakeholders
b. Minimize restrictions
3. Economical
a. Brand and reputation
b. Employee engagement
c. Profits
BOTTOM LINE: CSR yields great benefits to everyone.
Homework, which represents two questions on the final exam
plus …
1. Strategic issues for MNCs…from the list below research your
MNC and write one paragraph on each of the three topics
explaining how the MNC handles these issues.
· Performance Evaluation Measures
· Financial and Non-Financial Evaluation – how does your MNC
regard its foreign operation and how are the unit and the
manager evaluated.
· Management Control Systems and National Cultures
· What steps, if any, is your MNC taking to be sensitive to the
national culture?
· Corporate Social Responsibility (CSR)
· What is your MNC doing with regard to CSR?
2. Tell me why I should invest in your MNC; please provide at
least one calculation for a capital investment evaluation; i.e.

ROI, NPV, IRR or the payback period. (see notes above for
details on these techniques)
Your answers to the above two questions are to be included on
your final exam. There is no need to post them in this week’s
discussion area.
HOMEWORK REMINDER:
You are responsible to individually read all of the Group
Project presentations posted in Week 7 and also respond to at
least two different country posts. Your responses to the teams
should be posted in the same discussion area in Week 7 where
the presentations are posted.

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