Mod 40 Flashcards
Major controls over management:
1) compensation systems
2) BoD (and committees)
3) external auditors
4) internal auditors
5) attorneys
6) regulators
7) creditors
8) securities analysts
9) internal control systems
Internal Control, as defined by COSO, should provide reasonable assurance regarding achievement of objectives in the categories of:
1) reliability of financial reporting
2) effectiveness and efficiency of operations, and
3) compliance with applicable laws and regulations.
Components of Internal Control:
1) the control environment
2) the risk assessment process
3) control activities
4) information and communication, and
5) monitoring
Limitations of Internal Control:
1) management override
2) collusion (circumventing SOD)
3) bad judgment / misunderstanding of assigned duties leading to control break down
4) control costs versus benefits
What is Enterprise Risk Management (ERM)?
A process designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
ERM components:
1) internal environment
2) objective setting
3) event identification
4) risk assessment
5) risk response
6) control activities
7) information and communication
8) monitoring
What is a “Black Swan Analysis”?
Evaluating the occurrence of events that had negative effects and were unanticipated or viewed as highly unlikely.
What is the “Business Judgment Rule”?
A case law-derived concept that provides that a corporate director may not be held liable for errors in judgment providing the director acted in good faith with loyalty and due care.
What do corporate bylaws set forth:
1) how directors and / or officers are selected
2) how meetings are conducted
3) types and duties of officers
4) required meetings
5) should also prescribe the process for bylaw amendment.
What is an evaluator?
An individual that monitors internal control within an organization.
What is inherent risk?
The risk to the organization if management does nothing to alter an event’s likelihood or impact.
What is “residual risk”?
The risk to the organization resulting from an event after considering management’s response.
What is risk tolerance?
The acceptable variation with respect to achieving a particular objective.
Elements of the “Articles of Incorporation”:
1) Proposed name of the corporation and the initial address
2) Purpose of the corporation
3) Powers of the corporation
4) The Registered Agent of the corporation
5) Name and address of each incorporator
6) Number of authorized shares of stock and types of stock.
Requires public corporations to disclose why or why not the chairman of the board is also the CEO.
Dodd-Frank Act (Wall Street Reform and Consumer Protection Act of 2010).
Responsibilities of the Nominating / Corporate Governance Committee:
1) Oversees board organization, including committee assignments
2) Determines director qualifications and training
3) Develops corporate governance principles, and
4) Oversees CEO succession.
The BOD Financial Expert as defined by SOX possesses all of the following attributes:
1) An understanding of GAAP and Financial Statements
2) Experience in preparing, auditing, analyzing, or evaluating financial statements of the breadth and complexity expected to be encountered with the company
3) An understanding of internal controls and procedures for financial reporting, and
4) An understanding of audit committee functions.
Complaints from whistleblowers should be communicated to the __________?
Audit Committee of the BOD.
Section 302 of SOX makes who responsible for maintaining effective I/C, and requires significant deficiencies in I/C to be communicated to who?
Officers are responsible for maintaining I/C, and the principal executive and financial officer(s) must disclose significant I/C deficiencies to the company’s auditors and audit committee.
Responsibilities of the Compensation Committee:
1) Review and approve CEO compensation (based on meeting performance goals)
2) Make recommendations to the BOD with respect to incentive and equity-based compensation plans
3) Attempt to align incentives with shareholder objectives and risk appetite.
Per _______, all members of the compensation committee must be _______, and shareholders must be allowed a nonbinding vote on executive compensation at least every ______ years, and a vote at least every _______ years as to whether the vote on compensation should be held more often. And finally, requires a nonbinding vote by shareholders on “golden parachutes” for exectutives.
The Dodd-Frank Act requires all members of the compensation committee of the BOD to be independent.
Per the NYSE and NASDAQ rules, the following are required for public companies:
1) Majority of BOD must be independent
2) Make a determination of independence of director and provide to investors
3) Identify certain relationships that automatically precludes independence
4) Have non-management directors meet at regularly scheduled executive sessions
5) Adopt a code of conduct applicable to all directors, officers, and employees (must be made publicly available and must disclose any waivers of the code).
6) Have an independent Audit Committee (and other committee decisions must be made by independent committees)
Specific NYSE and NASDAQ rules the preclude director independence include:
1) Was an employee of corporation or affiliate in the last 5 years (3 years)
2) A family member has been an officer of the corporation or affiliate in the last 5 years (3 years)
3) Was a former partner or employee of the corporation’s external auditor in the last 5 years (3 years)
4) Director or family member received more than $120K from corporation for other than director compensation during last 3 years
5) Is an executive of another entity that receives significant amounts of revenue from the corporation.
What do the IA performance standards relate to?
The IA performance standards relate to the quality of IA activities.
