Corporate Governance - Module 40 Flashcards
(33 cards)
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.
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
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? (3)
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? (3)
Reliable financial reporting
Effective and efficient operations
Compliance
What are the elements of the control environment? (6)
MOAT HI
Integrity & Ethics Competence
The Board of Directors & Audit Committee
Management’s Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies
What are control activities?
(pg. 43)
A component of Internal Control that includes actions being taken to promote the control environment.
What are the basic elements of Internal Control? (5)
(pg. 42)
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
What is the significance of the Information and Communication aspect of Internal Control?
(pg. 43)
Management must have access to relevant and timely information to make good decisions.
How does Monitoring affect Internal Control?
(pg. 44)
Internal Control activities must be constantly monitored and evaluated for effectiveness.
What activities does the COSO framework for enterprise risk management include?
(pg. 48)
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?
(pg. 50)
Avoid or Reduce
Share or Accept
3 Committees of Effective Corporate Governance
(pg. 38)
- Nominating/Corporate Governance Committee
- Audit Committee (at least ONE financial expert)
- Compensation Committee
8 Components of Enterprise Risk Management
(p. 38)
- Internal Environment: risk appetite & risk tolerance
- Objective Setting: operations objectives, reporting objectives, compliance objectives
- Event Identification: event inventories, internal analysis, escalation/threshold triggers, facilitated workshops, process flow analysis, leading event indicators, loss event data methodologies
- Risk Assessment: inherent or residual risk
- Risk Response: avoidance, reduction, sharing, acceptance
- Control Activities
- Info & Communication 8. Monitoring
6 Limitations of the Internal Control Framework
(p. 45)
- Human judgement in decision making can be faulty
- Breakdowns can occur because of human failures
- Controls (manual or automated) can be circumvented by collusion
- Management has the ability to override internal control
- Cost constraints (costs should not exceed benefits)
- Custom, culture & the corporate governance system may inhibit fraud, but are not absolute deterrents
5 Components of COSO Internal Control Framework
(pg. 42)
- Control Environment (tone at the top): include integrity & ethical values, commitment to competence, board of directors or audit committee, managements philosophy, organizational structure, assignment of authority, human resource policies
- Risk Assessment: internal & external factors
- Control Activities: performance reviews & info processing controls
- Information & Communication
- Monitoring: control baseline, change identification, change management, control revalidation/update
3 Objectives of the Internal Control Framework
(pg. 42)
- Reliability of financial reporting
- Efficiency & effectiveness of operations
- Compliance with applicable laws & regulations
Monitoring Devices - Internal & External (11)
(pg. 37)
- Board Oversight (Internal)
- NYSE & NASDAQ (Internal)
- Internal Auditors (Internal)
- External Auditors (External)
- Investment Banks & Securities Analysts (External)
- Creditors (External)
- Credit Rating Agencies (External)
- Attorneys (External)
- SEC (External)
- IRS (External)
- Corporate Takeovers (External)
