B1-Corporate Governance Flashcards
Board of Directors
Primary Goal
Safeguard the company’s assets and to ultimately maximize shareholder return
Board of Directors Duties
- Election, removal, and supervision of officers; adoption, amendment, and repeal of bylaws; setting mgmnt compensation, and initiating fundamental changes to the corp’s structure
- Declaration of Distributions
- Fiduciary Duties
- Right to rely-reports or stmnts prepared by officers or employees
- Liability for Unlawful Distributions
- Duty of Loyalty
- Corporate Opportunity Doctrine
- Indemnification
- Limitation on Director Liability
- Manage Principal-Agent Conflict
Corporate Officers as Directors
- Selection and Removal
- Authority-actual and apparent
- Fiduciary Duties and Indemnification
- Also may Serve as Directors
- Not required to be Shareholders
Sarbanes-Oxley Act of 2002
Effects what and 3 main
Has a profound effect on the financial reporting requirements of public companies.
Sarbanes-Oxley Act of 2002
Corporate Responsibility
Public Company Audit Committee
Responsibilities
- responsible for the appointment, compensation, and oversight of the work of the public accounting firm
- Auditor reports directly to the audit committee
- responsbile for resolving disputes between the auditor and management
- Audit committee members are to be members of the issuer’s board of directors but are to be otherwise independent
- Must establish procedures to accept reports of complaints regarding audit, accounting, or internal control issues.
Sarbanes-Oxley Act of 2002
Corporate Responsibility
Financial Reports
Corporate officials, usually CEO and CFO, must sign certain representations regarding annual and quarterly reports including their assertion that
- They have reviewed the report
- The report doesnt contain any untrue statements or omit material information
- The f/s fairly present in all material respects the financial condition and results of operations of the issuer
- The CEO and CFO have assumed responsibility for the internal controls:evaluated and controls are effective
- CFO and CEO assert they disclosed:all signfiicant deficiencies in design or operation of internal controls;any fraud
- 7.
Sarbanes-Oxley Act of 2002
Enhanced Financial Disclosures
Disclosures in Periodic Reports
- All material correcting adjustments identified by the auditor should be reflected in the f/s
- The f/s should disclose all material off-balance sheet transactions
- Operating Leases
- Contingent Obligations-lawsuits
- Relationships with unconsolidated subsidiaries-related parties
- Conformance of pro forma f/s to the following requirements:
- No untrue statements
- No omitted material info
- Reconciled with GAAP basis f/s
- Use of special purpose entities (SPEs)
Sarbanes-Oxley Act of 2002
Enhanced Financial Disclosures
Conflict of Interest Provisions
- Issuers are generally prohibited from making personal loans to directors or executive officers
- unless made in ordinary course of business (banks)
Sarbanes-Oxley Act of 2002
Enhanced Financial Disclosures
Disclosure of Transactions Involving Management and Principal Stockholders
- Disclosures are required for persons who generally have direct or indirect ownership of more than 10 percent of any class of most any equity security.
Sarbanes-Oxley Act of 2002
Enhanced Financial Disclosures
Management Assessment of Internal Controls (Section 404)
- Statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
- An assessment as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures for financial reporting
- The auditor must attest to management’s assessment of internal control
Sarbanes-Oxley Act of 2002
Enhanced Financial Disclosures
Financial Expert
At least one member of the audit committee shoudl be a financial expert.
Qualifies through education, past experience as a public accountant, or past experience as a principal financial officer, comptroller, or principal accounting officer for an issuer.
Knowledge of GAAP, preparing f/s, application of GAAP, experience with internal controls
Sarbanes-Oxley Act of 2002
Corporate and Criminal Fraud Accountability
- Criminal Penalties for altering documents-fined, imprisonment for not more than 20 years, or both
- Statute of Limitations for Securities Fraud-no later than the earlier of two years after the discovery of the facts constituting the violation, or five years after the violation
- Whistle-Blower Protection-employees who lawfully provides evidence of fraud may not be discharged, demoted, suspended, threatened, harassed, or in any other matter discriminated against for providing such information.
- Criminal Penalties for Securities Fraud-fined, imprisoned not more than 25 years, or both
COSO
Committee on Sponsoring Organizations, an independent private sector initiative, was established in mid 1980s to study the factors that lead to fraudulent financial reporting.
COSO Framework-
who is it used by and why?
Used by company management and its board of directors to obtain an intial understanding of what constitutes an effective system of internal control and to provide insight as to when internal controls are being properly applied within the organization.
Provides confidence to stockholders that an organization has a system of internal control in place that is conducive to acheiving its objectives.
COSO Framework
Internal Control
Process that is designed and implemented by an org’s management, board of directors, and other employees to provide reasonable assurance that it will achieve its compliance, operating, and reporting objectives.
