B1 Corporate Governance

Question 1

What is the primary duty of the board of directors?

Answer 1

To monitor management behavior.

Safeguard company assets

Maximize shareholder return

Question 2

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

Answer 2

Oversees the board

Responsible for hiring new CEO

Question 3

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

Answer 3

The audit committee appoints and oversees the external auditor.

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

Internal Control Objectives (COSO)

Answer 19

Operations
Reporting* Focus of COSO
Compliance

Question 20

Components of Internal Control

Answer 20

Control enviornment 
Risk assessment
Information & communication systems
Monitoring
(Existing) control activities by management

Question 21

Control Environment (EBOCA)

Answer 21

Commitment to ethics and integrity
Board independence and oversight 
Organizational structure
Commitment to competence 
Accountability

Question 22

Risk Assessment (EAR)

Answer 22

Event identification
Assess risk
Respond to risk

Question 23

Information & Communication (FACT)

Answer 23

Fair, Accurate, Complete, Timely

Obtain & use information
Internally communicate information (internal audit, audit committee)
Communicate with external parties (CPA firm)

Question 24

Monitoring Activities

Answer 24

Frequency of testing dictated by risk
Communication of deficiencies

4 stages of change continuum 
Control Baseline
Change identification
Change management 
Control validation/update

Question 25

Existing Control Activities

Answer 25

Select & develop control activities
Select & develop technology controls
Deploy through policies & procedures

Question 26

Enterprise Risk Management (ERM) objectives (SORC)

Answer 26

Strategic - high level goals designed to achieve mission
Operations
Reporting
Compliance

Question 27

Components of ERM (IS EAR AIM)

Answer 27

Internal environment 
Setting objectives 
Event identification
Assessment of risk 
Risk repossess 
(Control) Activities 
Information and communication 
Monitoring