Corporate Governance

Question 1

What is the primary role of the board of directors?

Answer 1

Primary role – 
•	Safeguard the company’s asset 
•	Ultimately maximize shareholder return
Another critical role is to manage principal-agent conflict that may exist between shareholders and management.
(To monitor management behavior.)

Question 2

What is the specific duties of the board of directors?

Answer 2

• Election, removal, and supervision of officers (may remove officers without a cause);
• Adoption, amendment, and repeal of any bylaws;
• Set management compensation
• Initiate fundamental changes to the corporation’s structure.
The BoD has sole discretion to declare distribution to SH, including divs.

Question 3

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

Answer 3

Appointment of the auditor
Compensation of the auditor
Oversight of the external auditor
a. Resolve disagreements between auditor and mgmt.
b. Accounting firm reports directly to AC
> AC must establish a complaint procedure

Question 4

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

Answer 4

The compensation committee handles the CEO’s compensation package.

Question 5

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

Answer 5

They require the board to be independent.

Question 6

What is the main goal in an executive compensation package?

Answer 6

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

Question 7

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

Answer 7

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.

Question 8

Which influences help mold the direction that management takes?

Answer 8

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

Question 9

What is shirking?

Answer 9

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

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

Question 10

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

Answer 10

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.

Question 11

What characteristics are promoted by the COSO framework on Internal Control?

Answer 11

Reliable financial reporting

Effective and efficient operations

Compliance

Question 12

What are the elements of the control environment?

Answer 12

Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management's Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies

Question 13

What are control activities?

Answer 13

A component of Internal Control that includes actions being taken to promote the control environment.

Question 14

What are the basic elements of Internal Control?

Answer 14

Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring

Question 15

What is the significance of the Information and Communication aspect of Internal Control?

Answer 15

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

Question 16

How does Monitoring affect Internal Control?

Answer 16

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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

Avoid or Reduce

Share or Accept

Question 19

What is the authority of the BoD?

Answer 19

• No individual authority. It acts as group if quorum, then duly constituted.

Question 20

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

Answer 20

Oversees the board

Responsible for hiring new CEO

Question 21

What are the fiduciary duties of BoD?

Answer 21

Independent and Objective
Duty of Loyalty - BoD must always act in the best interest of the company. Success not insured.
Disclosure of Conflicts - Corporate Opportunity Doctrine

Question 22

What is theCorporate Opportunity Doctrine

Answer 22

if a director is presented with a business opportunity that is of interest to his company, the duty of loyalty prohibits the director from taking the opportunity for himself.

Question 23

What is the business judgment rule?

Answer 23

A director will not be liable to the corporation for acts performed or decisions made in good faith, if conducted in a manner that the director believes to be in the best interest of the corp. and with the care an ordinarily prudent person in like position. Directors will only be liable to the corporation for negligent acts or omissions (i.e. failure to obtain fire insurance, hiring a convict embezzler as treasurer)

Question 24

What does Title III - Corporate Responsibility addresses?

Answer 24

Public company audit committees
Corporate responsibility for financial reports
No improper influence on the conduct of the audit
Forfeiture of certain bonuses and profits

Question 25

SOX defines the criteria for the independence of audit committee members for issuers as including the following characteristics:

Answer 25

> Members of the audit committee, but shall otherwise independent > May not accept any consulting, advisory, or any other compensation or fees other than pursuant to their role on the Board. > May not be an affiliated person (can influence financial decisions)

Question 26

SOX requires that AC establish a complaint procedure that includes:

Answer 26

1. Receipt, retention, and treatment of complaints regarding: a. Accounting b. IC c. Auditing 2. Confidential or anonymous submissions by employees or issues regarding questionable accounting or auditing matters.

Question 27

What are the Corporate responsibility for financial reports under SOX III?

Answer 27

The CEO and CFO must sign certain representations regarding annual and quarterly repots, including their assertions that reports have been: > read/reviewed > Include no untrue statements > FS are truly stated > By signing they assert their responsibility for IC: > By signing they assert certain disclosures to AC.

Question 28

CEO and CFO by signing report assume responsibility for internal control, including assertions that:

Answer 28

* IC have been DESIGNED to ensure material info has been made available * IC have been EVALUATED for effectiveness as of a date within 90 days prior to the report * Report includes their conclusions as to the EFFECTIVENESS OF IC based upon their evaluation.

Question 29

CEO and CFO by signing report assert that they have made the following disclosures to the audit committee:

Answer 29

* All significant deficiencies in the design or operation of IC * Any fraud, regardless of materiality

Question 30

No improper influence on the conduct of the audit clause under SOX III refers to

Answer 30

No officer or director, or any person acting under the direction thereof, may take any action that would fraudulently influence, coerce, mislead, or manipulate the auditor in a manner that would make the FS materially misleading.

Question 31

Forfeiture of certain bonuses and profits clause under SOX II refers to:

Answer 31

If issuer is required to prepare accounting restatement due to material noncompliance under the securities laws, the CEO and CFO may be required to reimburse the issuer for: • Bonuses or incentive-based or equity-based compensation • Gains on sale of securities during the 12-month period

Question 32

What does Title IV - Enhanced Financial Disclosures addresses?

Answer 32

* Disclosures in periodic reports * Conflict of interest provision * Disclosure of transactions involving management and principal stockholder * Management Assessment of IC – Section 404. * Certain exemptions * Code of ethics for senior officers * Disclosure of Audit Committee “Financial Expert” * Enhanced review of period disclosures by issuers (by SEC)

Question 33

Arguments that BoD operates independently and has fulfilled its oversight function in accordance with the COSO

Answer 33

Disclosure in writing of any personal relationship Disclosure of any material direct or indirect financial transaction w/ the company There is a process where VP of the board reviews these disclosures and evidences his review via signature on the certification statement. Prior to voting board members are reminded to vote independently board member can recuse themselves from the vote board minutes documents the actions of the board must be consistent w/ policy defined in the by-laws auditors review minutes and by-laws to find evidence to support a conclusion on board oversight Nominating committee identifies and screens potential board members. Evidence that the committee has performed their duties includes a review of background checks and written recommendations

Question 34

Arguments that BoD has fulfilled its oversight function in accordance with the COSO regarding monitoring risk:

Answer 34

Auditors will assess the board's ability to monitor risk One of the most powerful ways to demonstrate effective board oversight is to establish an empowered audit committee with the authority and responsibility to meet privately with internal and external auditors and respond directly to significant audit findings.

Question 35

Arguments that BoD has fulfilled its oversight function in accordance with the COSO and retains financial reporting expertise:

Answer 35

Staffing the audit committee with knowledgeable financial professionals such as CPAs provides additional comfort to auditors that the board has the capacity to understand the gravity of the issuers put before them. Board containing at least one financial expert with expertise developed through education and/or experience. Auditors have both the charter and by-laws to support the creation and empowerment of the audit committee, their selections and attention provides further support that the audit committee is actually performing the responsibilities assigned to it.

Question 36

Arguments that BoD has fulfilled its oversight function in accordance with the COSO and oversees audit activities:

Answer 36

Effective oversight can be obtained by: > Reviewing the certification statements made by the audit committee which attest to review activities performed and decisions made. > Board minutes document the adoption of new accounting policies and procedures. > Auditors can examine whistle-blower logs to determine how complaints were handled and the timeliness of board responses.

Question 37

How the COSO - Internal Control Framework assists an entity's management and BoD?

Answer 37

1. Effectively applying IC within the overall organization 2. Determining the requirements of an effective system of IC 3. Allowing judgment and flexibility 4. Identifying and analyzing risks 5. Eliminating redundant, ineffective, or inefficient controls. 6. Extending IC application beyond an organization’s financial reporting (efficient & effective operation compliance w/ laws)

Question 38

How the COSO - Internal Control Framework assists | Shareholders

Answer 38

a. Greater understanding of what constitutes an effective system of IC b. Greater confidence that management will be able to eliminate ineffective, redundant, or inefficient controls. c. Improved confidence that the organization will achieve objectives and will be able to identify, analyze, and respond to risks affecting the organization.

Question 39

What does Title IV - Enhanced Financial Disclosures addresses in Disclosures in periodic reports

Answer 39

The purpose it to promote - GAAP and transparency to the reader. a. All material correcting adjustments identified by the auditor should be reflected in the FS. b. All material off-balance sheet transactions should be disclosed: • Operating leases • Contingent obligations – lawsuits • Relations with unconsolidated subs – related parties c. Conformance of pro-forma FS to the following requirements: • No untrue statements • No omitted material info • Reconciled with GAAP basis FS d. Use of special purpose entities (SPE’s)

Question 40

What is the independence requirement of Dodds Frank Act of 2010 for the board of directors? Disclosure?

Answer 40

All members of the compensation committee of the board of directors must be independent Must disclaim of why or why not the chairman of the board is also the CEO

Question 41

What is the independence requirement of NYSE?

Answer 41

A director is not independent if he receive $120,000 in payments, no including compensation for serving on the board, from the corp. in the 12 months period in the last 3 years. A director is not independent if he has been employed by the corp. in the last 5 years A director is not independent if he was a former parter with the corp.'s external auditor in the last 5 years.

Question 42

What serves as the staring point for control monitoring?

Answer 42

A baseline understanding of the system.