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BEC - 2012 > Module 40 > Flashcards

Module 40 Flashcards

(51 cards)

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1
Q

CORPORATE

GOVERNANCE

A
  • Effective corporate goverance involves developing an appropriate legal structure, establishing appropriate incentives and monitoring devices to prevent the agency problem
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2
Q

AGENCY

PROBLEM

A
  • Because the owners (shareholders) are separate from management, managers may be tempted to engage in self-serving activities, such as shrinking, taking too much or too little risk, or consuming excessive perks.
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3
Q

ARTICLES OF INCORPORATION

A
  1. Name and Address
  2. Purpose
  3. Powers
  4. Name of Registered Agent
  5. Name and Address of Incorporators
  6. # of Authorized Shares and Type
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4
Q

BYLAWS

A

Set for rules such as:

  1. How Directors/Officers are selected
  2. How Meetings are conducted
  3. Types and Duties of an Officer
  4. Required Meetings
  • All officers and directors should be provided with a copy of the corporations bylaws
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5
Q

TYPES OF EXECUTIVE COMPENSATION

A

Key objective is to align managements decisions and actions with the long-term interest of the shareholders.

Types

  1. Base Salary and Bonus
  2. Stock Options
  3. Stock Grants
    • Restricted - cant be sold for a while
    • Performance
  4. Executive Perks
  • Best form include combination of fixed and incentive compensation that include both quantitative and qualitative measures
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6
Q

MONITORING

DEVICES

A

Devices to monitor management behavior. Some are internal and external.

  1. Board of Directors
  2. NYSE/NASDAQ Rules
  3. Internal Auditors
  4. External Auditors
  5. Investment Banks & Security Analysts
  6. Creditors
  7. Credit Rating Agencies
  8. Attorneys
  9. The SEC
  10. The IRS
  11. Corporate Takeovers
  12. Shareholders
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7
Q

BOARD OF

DIRECTORS

A

Duties of the board include:

  1. Determine the Mission
  2. Select/Remove the CEO
  3. Amend Bylaws (s/h majority vote)
  4. Decide Mgmt compensation
  5. Decisions regarding Dividends
  6. Decisions regarding Capital Structure
  7. Advising Mgmt
  8. Assit w/ Governance Oversight w/ auditors
  9. Ensure Accurate Financial Reporting
  10. Risk Managment
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8
Q

BUSINESS

JUDGEMENT RULE

A
  • A corporate director may not be held liable for errors in judgement providing the director acted with good faith, loyalty, and due care
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9
Q

DIRECTORS

AND OFFICERS

A
  1. Directors -
    • must be competent/indep.
    • cannot bind the corp
    • owe a duty of due care
  2. Officers -
    • agents, can bind if in scope of duties
    • if on board, known as inside directors
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10
Q

CORP. GOVERNANCE COMMITTEES

A
  1. The Nominating/Corp. Governance Committee
  2. The Audit Committee
  3. The Compensation Committee
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11
Q

NOMINATING/CORP. GOVERNANCE COMMITTEE

A
  • The Nominating/Corp. Governance Committee has 4 functions
  1. Oversees board organization
  2. Determines Director Qualifications/Training
  3. Develops Corp. Governance Principles
  4. Oversees CEO Succession
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12
Q

AUDIT COMMITTEE

A
  • Characteristics of Audit Committee include:
  1. One member must be “financial expert”
  2. Appoint, determine compensation, and oversee work of External auditors
  3. External auditors must report directly to audit committee
  4. Internal auditors must have direct access to audit committee
  5. Establish procedures for complaints on accounting matters, incl whistle blowers
  6. Officers responsible for maintaining effective IC, and report deficiencies to audit committee and auditors
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13
Q

COMPENSATION

COMMITTEE

A
  • Duties of Compensation Committee include:
  1. Reviews and Approves CEO compensation based on meeting goals
  2. Makes recomendation to board on incentive and equity based compensation
  3. Attempts to align incentives based on shareholder objectives

Dodd-Frank

  • Memebers must be independant.
  • S/H vote every 3 years on exec comp
  • S/H vote on golden parachutes
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14
Q

NYSE & NASDAQ REQUIREMENTS

A
  1. Majority of Independent Directors on board
  2. Evaluate independence
  3. Identify situations that preclude independence
  4. Have nonmanagement directors regulary meet
  5. Adopt a publicly available code of conduct
  6. Have an independent audit committee
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15
Q

NYSE & NASDAQ INDEPENDENCE FACTORS

A
  • When Independence DOESN’T exist
  1. Director was an employee of the corp. or affiliate over past 5 yrs (3 for NAS)
  2. Family member was an officer or the corp. or affiliate over past 5 yrs (3 for NAS)
  3. Partner of external audit company over past 5 yrs (3 for NAS)
  4. Received over $120k in last 3 yrs in nondirector compensation
  5. If an executive of another company that significant revenue is generated from
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16
Q

INTERNAL AUDITORS

A
  1. Perform two types of services; assurance and consulting
    • Assurance - independent assessment of governance, risk assessment
    • Consulting - advisory services
  2. Results should be communicated directly to the audi committee and board
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17
Q

INTERNAL AUDITORS STANDARDS

A
  1. Purpose, authority, should be defined in internal audit charter
  2. Work should be organizationally independent - only report to CEO adminly
  3. Perform engagements with proficiency and due care
  4. Enhance skills w/ CPE
  5. Evaluate and improve risk managament
  6. Cheif audit exec should establish risk based plans for audit priorities
  7. Cheif audit exec should establish monitoring systems and report to mgmt
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18
Q

EXTERNAL

AUDITORS

A
  • Responsible for performing an audit of the f/s and internal control according to PCAOB
  • Sec. 404 of SOX makes mgmt attest to internal control and mgmt must sign off for large and accel filiers
  • Must communicate to audit committee info that will help with oversight, such as weaknesses in IC, disagreements w/mgmt
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19
Q

INVESTMENT BANKS AND SECURITY ANALYSTS

A
  • Represent an external monitoring device because they must evaluate a company before selling securities
  • Conflict of interest may exist if an analyst is part of the same company handling the investment banking
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20
Q

CREDITORS

A
  • Act as an external monitoring device because debt agreements contain covenants that must be complied with to prevent a creditor from taking action
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21
Q

CREDIT RATING

AGENCIES

Study These Flashcards
A
  • Act as an external monitoring similiar to analysts.
  • Often crticized for being hesitant to downgrade
22
Q

SEC

Study These Flashcards
A
  • Responsible for protecting investors, promoting and maintaining fair and efficient markets, and facilitating capital formation
  • Corp. Governance Divisions include
  1. Division of Corp. Finance - reviews all filings
  2. Division of Enforcement - assits w/ enforcing laws and prosecuting
  3. The Office of Cheif Accountant - advises accountingn and auditng, approves PCAOB ideas
23
Q

SOX - SEC

Study These Flashcards
A
  1. Sec.906 requires CEO and CFO to certify financials
  2. Any person knowingly commits fruad can be fined and/or imprisioned for 25yrs
  3. Messing with info in an ongoing case can result in fines and/or 20ys in jail
  4. Can’t punish whistle-blowers. If you do you can face fines and/or jail for 10yrs
24
Q

CORPORATE

TAKEOVERS

Study These Flashcards
A
  1. Corporate takeovers present a threat to mgmt and therefore act as a monitoring device so mgmt doesn’t lose the corp.
  2. Poison Pill Defense - strategy to avoid a take over in which s/h have the option to purchase shares at a discount if someone tries to gain a controlling interest
25
**SHAREHOLDERS**
1. No right to manage the corp 2. Right to inspect the books 3. Derivative suit where rewards go to the company 4. Preferred have rights to dividends and assets in liquidation - no voting rights 5. Common have voting rights to elect directors, decisions to dissolve, or fundamental changes in the org.
26
**INTERNAL CONTROL**
- A process effected by the entity's board of directors, managament and other personal designed to provide resonable assurance regarding the achievemnt of objectives in: 1. Reliability of f/s 2. Effectiveness/Efficency of Ops 3. Compliance with laws
27
**INTERNAL CONTROL COMPONENTS**
1. Control Enviroment 2. Risk Assessment process 3. Control Activities 4. Information and Communication 5. Monitoring
28
**CONTROL** **ENVIROMENT**
- The tone at the top. Factors include: 1. Integrity and Ethical Values 2. Commitment to competence 3. Effective Board and Audit Committee 4. Managements philosophy and style 5. Org. Structure 6. Assignment of Authority & Responsibility 7. Human Resource policies/procedures
29
**RISK** **ASSESSMENT**
- Risk assessment is managments process for identifying, analyzing and responding to risk 1. Internal Factors - personell, systems 2. External Factors - economic conditions, competition
30
**CONTROL** **ACTIVITIES**
- Policies and procedures that help ensure that managment directives are carried out. Controls include: 1. Performance Reviews - Reviews actual amounts versus budgets, forecasts 2. Information Processing Controls - controls check accuracy and authorization of data * General Controls * Application Controls * Physical Controls * Segregation of Duties
31
**INFORMATION & TECHNOLOGY**
- To make effective decisions mgmt must have timley, reliable and relevant info. To be effective: 1. Identify and record all valid transactions 2. Describe transactions timely 3. Measure the value of the transactions 4. Record in proper time period 5. Properly present and disclose 6. Communicate responsibilities to employees
32
**MONITORING**
- Processed used to assess the quality of IC over time. - Acheived either ongoing or seperate * Ongoing - regularly supervisory and managment activities * Seperate - periodic internal audits
33
**EVALUATORS**
- Those charged with monitoring controls - Should be competent and objective - Competent with IC, and obejective as to not fear finding a deficiency
34
**MONITORING** **SEQUENCE**
1. Control Baseline 2. Change Identification 3. Change Management 4. Control Revalidation/Update
35
**CONTROL** **BASELINE**
- Establishing a starting point that includes a supported understanding of the existing IC system
36
**CHANGE** **IDENTIFICATION**
- Identifying through monitoring changes in internal control that are necessary becuase changes in the operating environment have taken place
37
**CHANGE** **MANAGEMENT**
- Evaluating the deisgn and implementation and establishing a new baseline - Effective process allows mgmt to control: 1. Change requests 2. Change analysis 3. Change decisions 4. Change planning, implementation and tracking
38
**CHANGE** **REVALIDATION/UPDATE**
- Periodically revalidation control operation when no changes have occured
39
**IC LIMITATIONS**
- Only reasonable assurance, not absolute: 1. Human judgement can be faulty 2. Brekdown from human errors/mistakes 3. Controls circumvented by collusion 4. Mgmt override of controls 5. Cost costraints 6. Corp. governance may inhibit fraud
40
**SEGREGATION** **OF DUTIES**
- The following functions should be segregated: 1. Authorization 2. Approval 3. Execution (custody of assets) 4. Recordkeeping
41
**ENTERPRISE RISK MANAGEMENT**
- ERM is a process, effected by an entity's board, mgmt, and other personnel, applied in a strategy setting and accross the corp. Designed to identify potential events, manage risk within risk appetite, and provide reasonable assurance regarding the acheivement of entity objectives
42
**ERM COMPONENTS**
1. Internal Enviroment 2. Objective Setting 3. Event Identification 4. Risk Assessment 5. Risk Response 6. Control Activities 7. Information and Communication 8. Monitoring
43
**INTERNAL** **ENVIRONMENT**
- Internal environment is the basis for all other components of ERM. - The board is critical - Risk Appetite - is the amount of risk a corp. is willing to accept to achieve its goals - Risk Tolerance - is the acceptable variation with respect to a particular objective
44
**OBJECTIVE** **SETTING**
- Objectives must exist b/f mgmt can identify events affecting their achievment, categories are: 1. Operations - relate to effectiveness of ops 2. Reporting - reporting of ext/int financial and non financial info 3. Compliance - adhering to laws and regulations
45
**EVENT** **IDENTIFICATION**
- Potential internal/external events affecting achievment of an corps. objectives must be identified, distinguising between risks and ops. Techniques include: 1. Event Inventories 2. Internal Analysis 3. Escalation Triggers 4. Facilitated Workshops 5. Process Flow Analysis 6. Leading Event Indicators 7. Loss Event Data Methodologies * Black Swan - highly unlikely event analysis
46
**RISK ASSESSMENT**
- Risks are anlayzed, considered for likelihood, as a basis for determining how to handle - Probalistic Models - associate a range of events and their impact based on assumptions - Nonprobalistic Models - use subjective assumptions in estimated the impact of events without qualifying the liklihood
47
**RISK RESPONSE**
- Mgmt selects risks based on the corp. risk appetite including: 1. Avoidance - exit the risk activity 2. Reduction - take action to reduce, add controls 3. Sharing - hedge risk w/ insurance 4. Acceptance - No action taken, consistent with risk appetite
48
**CONTROL ACTIVITIES**
- Policies and procedures should be established and implemented to help ensure the risk responses are effectively carried out
49
**INFORMATION AND COMMUNICATION**
- Relevant info is identified, captured and communicated to enable people to carry out their duties. - Info is needed at all levels - Communication should convey impportantance of ERM, the orgs objectives, and risk appetite/tolerance
50
**MONITORING**
- The entire ERM process should be monitored to make needed modifications - Do so by ongoing mgmt activities, seperate evaluations performed by internal auditors
51
**ERM LIMITATIONS**
- Limitations include: 1. Risks relate to the future which is uncertain 2. Cannot provide reasonable assurance objectives will be acheived 3. Cannot provide absolute assurance on any objective * Similiar to IC constraints

BEC - 2012 (8 decks)

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