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Flashcards in BEC 1 Corporate governance Deck (43):

Rights, duties, responsibilities of the Board of directors

1. Declaration of distribution
2. Fiduciary duty
a. Right to rely
b. Liability for unlawful distributions
c. Duty of loyalty
d. Corporate Opportunity Doctrine
3. Indemnification
4. Limitation on director liability


Rights, duties, responsibilities of Officers

1. Selection and removal
2. Authority
3. Fiduciary duties and indemnification
4. May also serve as directors
5. Not required to be shareholders


Sarbanes- Oxley Act “Corporate Responsibility” Title III

1. Public company audit committee
2. Corporate responsibility for financial reports
3. Improper influence on conduct of audits
4. Forfeiture of certain bonuses and profits


Audit Committee

1. Appointment of the auditor
2. Compensation of the auditor
3. Oversight of the auditor
a. Resolve disagreements between management and the auditor
b. The accounting firm reports directly to the audit committee


Criteria for the independence of audit committee members for issuers

1. Each member of the audit committee shall be a member of the board of directors of the issuer but shall be otherwise independent
2. Audit committee members may not accept any consulting, advisory or other compensation or fees from the issuers other than pursuant to their roles on the board
3. Audit committee members may not be an affiliated person (a person who can influence financial decisions) of the issuer or any subsidiary of the issuer


Audit Committee establishes a complaint procedure

1. Receipt, retention and treatment of complaints received by issuer regarding:
a. Accounting
b. Internal controls
c. Auditing
2. Confidential or anonymous submissions by employees of issuers regarding questionable accounting or auditing matters


Components of Internal Control

1. Control environment
2. Risk assessment
3. Information and communication system
4. Monitoring
5. Existing Control activities


Corporate responsibility for financial reports for issuers

The CEO and CFO must certify the following for annual and quarterly reports:
1. The officers have read the report
2. the report does not include untrue statements
3. The financial statements are fairly stated
4. The signing officers make assertions regarding their responsibilities for internal control
5. the signing officers have disclosed internal control weakness and instances of fraud to the auditors and the audit committee
6. The status of changes to internal control subsequent to the date of their evaluation


Corporate responsibility regarding internal controls that must accompany financial reports

The CEO and CFO must certify the following for annual and quarterly reports:
1. The officers are responsible for establishing and maintaining internal controls
2. Internal control is designed to ensure that material information is provide to internal and eternal users.
3. Internal controls have been evaluated within 90 days prior to the report
4. The officers conclusion regarding internal control effectiveness as of the evaluation date


Corporate responsibility regarding the required disclosures to the auditors and audit committee by officers

The CEO and CFO must certify the following for annual and quarterly reports to the auditors and the audit committee:
1. All significant deficiencies in the design or operation of internal controls
2. Any fraud, whether or not material, that involves management


Improper influence on the conduct of audits

No officer or director may take any action to fraudulently influence, coerce, manipulate, or mislead an independent CPA engaged in an audit of the financial statements of an issuer for the purpose of rendering the financial statements materially misleading


Enhanced financial disclosures

1. Disclosure in periodic reports
2. Enhanced conflict of interest provisions
3. Disclosures of transactions involving management and principal stockholders
4. Management assessment of internal controls
5. Exemption
6. Code of ethics for senior financial officers
7. Disclosure of audit committee financial expert
8. Enhanced review of periodic disclosures by issuers
9. Real time issuer disclosures


Disclosures required in periodic reports

1. all adjusting entries identified by the public accounting firm reporting on the financial statements
2. All of balance sheet transactions including contingent obligations and other relationships that may have a material current or future effect on the financial statements
3. Pro forma financial statements shall include all relevant information and shall not include misleading or untrue inflation


Conflict of interest provisions

Prohibitions on personal loans to executives with some exemptions


Provisions for disclosure of transactions involving management and principal stockholders

Reporting by persons with ownership of 10% or more.
Statements are filed at the time of registration, when a person achieves 10% ownership, and when there has been a change in ownership.


Management assessment of internal controls

1. Management’s assertion that it is responsible for adequate internal control structure
2. Management’s conclusions regarding its assessment of effectiveness of the internal control structure and procedures for financial reporting
3. the auditor’s attestation regarding management’s assessment of internal control


Audit committee disclosures

The issuer must disclose the existence of a financial expert on the committee or the reasons why the committee does not have a member who is a financial expert


Financial expert

A financial expert qualifies through education, past experience as a public accountant, or past experience as a financial officer for an issuer.
Knowledge of the financial expert should include:
1. Understanding of GAAP
2. Experience in the preparation or auditing of financial statements for comparable issuers.
3. Application of GAAP
4. Experience with internal controls
5. Understanding of audit committee functions


Sarbanes Oxley’s topics

1. Criminal penalties for altering documents
2. Statue of limitations for securities fraud
3. Whistleblower protection
4. Criminal penalties for securities fraud


Components of Internal Control Integrated Framework

1. Control environment
2. Risk assessment
3. Information and communication
4. Monitoring
5. Existing Control Activities


Control environment

1. Management’s philosophy and operating style
2. Human resources
3. Financial reporting competencies
4. Authority and responsibility
5. Organizational structure
6. Integrity and ethical values
7, Board of directors


Risk assessment

1. Financial reporting objectives
2. Financial reporting risks
3. Fraud risk


Control activities

1. Risk assessment integration
2. Selection and development
3. Policies and procedures
4. Information and technology


Information and communication

1. Financial reporting information
2. Internal control information
3. Internal communication
4. External communication



1. Ongoing and separate evaluations
2. Reporting deficiencies


Components of Enterprise Risk Management ERM

1. Internal environment
2. Objective setting
3. Event identification
4. Risk assessment
5. Risk response
6. Control activities
7. Information and communication
8. Monitoring


Internal environment

1. Philosophy of risk management
2. Human resources standards
3. Risk appetite
4. Authority and responsibility
5. Structure (organizational)
6. Ethical values
7. Directors
8. Commitment to competence


Objective setting

1. Strategic objectives
2. Related objectives
3. Selected objectives
4. Risk appetite
5. Risk tolerance


Event identification

1. Events
2. Influencing factors
3. Event identification techniques
4. Event interdependencies
5. Event categories
6. Distinguishing risks and opportunities


Risk assessment

1. Inherent and residual risk
2. Establishing likelihood and impact
3. Data sources
4. assessment techniques
5. Event relationships


Risk response

1. Evaluating possible responses
2. Selected responses
3. Portfolio view


Control activities

1. Integration with risk responses
2. types of control activities
3. policies and procedures
4. controls over information systems
5. Entity specific


Information and communication

1. Information
2. Communication



1. Ongoing monitoring activities
2. Separate evaluations
3. Reporting deficiencies


Control environment - Integrity and ethical values principles

Top management must set a standard of conduct for financial reporting that demonstrates a commitment to integrity and ethical values.


Control environment - board of directors

The board of directors is charged with understanding and exercising oversight responsibility for financial reporting and related internal control


Control environment - management philosophy and operating style

management philosophy and operating style should support achieving effective internal control over financial reporting


Control environment - organizational structure

the organizational structure of the company should support effective internal control over financial reporting


Control environment - financial reporting competencies

The company retains only individuals who are competent in financial reporting roles


Control environment - authority and responsibility competencies

assignment of authority and responsibility should promote and effectively achieve internal control over financial reporting


Control environment - human resources

human resources principles and practices promote and achieve effectiveness with respect to internal control over financial reporting


Monitoring - ongoing and separate evaluations

the functioning of internal control over financial reporting must be verified on an ongoing basis or in separate evaluations


Monitoring - reporting deficiencies

deficiencies in internal control over financial reporting should be identified and reported timely to parties responsible for taking corrective action, to management, and the board