Corporate Governance Flashcards Preview

BEC So Far > Corporate Governance > Flashcards

Flashcards in Corporate Governance Deck (31):

What is the primary duty of the board of directors?

To monitor management behavior.


What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?

Oversees the board

Responsible for hiring new CEO


What is the responsibility of the audit committee of the board of directors?

The audit committee appoints and oversees the external auditor.


What is the duty of the compensation committee of the board of directors?

The compensation committee handles the CEO's compensation package.

DF Act says shareholders must have nonbinding vote on executive compensation every 3 years

Shareholders get to vote on golden parachutes


What does the NYSE and NASDAQ require of the board of directors?

They require the board to be independent.

NYSE is more strict - no affiliations within last 5 years. NASDAQ only last 3 years.


What is the main goal in an executive compensation package?

The package should ensure that the goals of management should match those of the shareholders.


How can an executive compensation package ensure that goals of management align with those of shareholders?

Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.


Which influences help mold the direction that management takes?

They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)

These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties


What is shirking?

When management doesn't act in the best interest of shareholders.

It can be alleviated by tying compensation to stock performance or company profit.


What requirements are imposed on a public company under Sarbanes-Oxley?

Management must submit a report on the effectiveness of Internal Control in the 10K.

Management must disclose significant Internal Control deficiencies.

CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.


What characteristics are promoted by the COSO framework on internal control?

Reliable financial reporting

Effective and efficient operations



What are the elements of the control environment?

I ntegrity & Ethics
C ompetence
H R Policies
A ssignment of authority and responsibility
M anagement's Operating Style
B oard of Directors & Audit Committee
O rganizational Structure


What are control activities?

Policies and procedures that help ensure management directives on internal control are carried out.
E.g. Authorization and approval, physical controls, verifications, etc.


What are the basic elements of internal control?

Control Environment
Risk Assessment
Control Activities
Information and Communication


What is the significance of the Information and Communication aspect of internal control?

Management must have access to relevant and timely information to make good decisions.


How does Monitoring affect internal control?

Internal Control activities must be constantly monitored and evaluated for effectiveness.


What activities does the COSO framework for enterprise risk management include?

Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement

Does NOT eliminate all risk


What are possible responses to risk under the COSO framework for enterprise risk management?

Avoid or Reduce

Share or Accept


What is the agency problem?

Corporate management may not operate in the best interest of shareholders


What is included in the Articles of Incorporation?

Proposed name and initial address
Powers of corporation
Name of registered agent
Name and address of each incorporator
Number of authorized shares and types of stock

Typically amendments must be approved by shareholders


What are a shareholder's rights?

Elect board of directors
Receive dividend once declared
Subscribe to stock issues so ownership won't be diluted
May inspect books and records in good faith for proper purpose
Can sue on behalf of corp. if officers are violating fiduciary duty (derivative suit)


What is the business judgement rule?

A corporate director may not be held liable for errors in judgement providing they acted in good faith, loyalty and due care


What is a financial expert and which committee must have one?

Audit committee must have one

Expert understands GAAP and financial statements
Has experience preparing, auditing, analyzing or evaluating financial statements in same complexity as current company
Understands internal controls for financial reporting


What are the standards for Internal Auditors?

Attribute standards - characteristics of internal audit activity

Performance standards - quality of internal audit activities

Implementation standards - expands on above standards


What are the levels of Filers with SEC?

Large Accelerated ≥ $700M
Accelerated ≥ $75M and < $75M


What are the divisions of the SEC?

Corporate Finance - reviews reports from public companies

Enforcement - assist with executing law enforcement, which cases to take to court

Office of Chief Accountant - advises SEC on accounting and auditing, approve rules by PCAOB

Office of Whistleblower - handles tips and complaints, provides guidance to Enforcement division and whistleblowers


How did SOX improve the SEC's power?

CEO and CFO must certify reports filed with SEC

Made prosecution of fraud easier

Made destruction or tampering with documentation illegal

Prohibits retaliation against whistleblowers


What does the Dodd-Frank Act regulate?

Gives awards to whistleblowers

Strengthened rules for retaliation against whistleblowers - they can now sue corporation


What is the JOBS Act?

Exemption rules for Emerging Growth Companies

For up to 5 years from date of IPO

Exempt from:
- Certain disclosure requirements
- Integrated audit of internal control
- Shareholder vote on executive compensation


What is internal control under the COSO framework?

A process enacted by the BOD, management, and others to provide a reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance


What are the classifications of internal control?

Preventative controls
Detective controls
Corrective controls
Feedback controls
Feed-forward controls