BEC 1 Corporate Governance Part 1 Flashcards
Title III of the SOX, Corporate Responsibility, includes 4 topics pertaining to financial reporting. What are they?
- Public Company Audit Committees
- Corporate responsibility for financial reports
- Improper influence on conduct of audits
- Forfeiture of certain bonuses and profits
The SOX Act defines the responsibility of the audit committee of an issuer as including:
- Appointment of the auditor
- Compensation of the auditor
- Oversight of the auditor
3a - Resolve disagreement btw management and the auditor
3b - The auditor reports directly to the audit committee
The SOX Act defines the criteria for the independence of audit committee member for issuers as including the following 3 characteristics:
- Each member of the audit committee shall be a member of the board of directors of the issuer but shall be otherwise independent.
- Audit committee members may not accept any consulting, advisory or other compensation or fees from the issuer other than pursuant to their roles on the board.
- Audit committee members may not be an affiliated person (a person who can influence financial decisions) of the issuer or any subsidiary of the issuer.
The SOX Act requires that an issuer’s audit committee establish a complaint procedure that includes:
- Receipt, retention, and treatment of complaints, received by issuers regarding:
1a) Accounting
1b) Internal Control
1c) Auditing - Confidential or anonymous submissions by employees of issuers regarding questionable accounting or auditing matters.
SOX assigns the following corporate responsibilities for financial reports for issuers:
The CEO and CFO must certify the following for annual and quarterly reports:
- The officers have reviewed the report
- The report does not include untrue statements or omit material information
- The F/S are fairly stated
- The signing officers make assertions regarding their responsibilities for internal control.
- The signing officers have disclosed internal control weakness and instances of fraud to the auditors and the audit committee.
- The status of changes to I/C subsequent to the date of their evaluation.
SOX assigns the following 4 corporate responsibilities regarding I/C that must be accompany financial reports:
- The officers are responsible for establishing and maintaining internal controls.
- I/C is disigned to ensure that material information is provided to internal and external users.
- I/C have been evaluated w/i 90 days prior to the report
- The officers’ conclusions regarding I/C effectiveness as of the evaluation date.
SOX assigns the following 2 corporate responsibilities regarding the required disclosures to the auditors and the A/C by officers:
- All significant deficiencies in the design or operation of I/C.
- Any Fraud, whether or not material, that involves management.
The SOX act specifically prohibits improper influence on the conduct of audits defined as follows:
No officer or director may take any action to fraudulent influence, coerce, manipulate, or mislead an independent CPA engagement in an audit of the F/S of an issuer for the purpose of rendering the F/S materially misleading.
The SOX imposes certain financial penalties an officer who are responsibilities for material misstatements resulting from their misconduct. Penalties included:
- Refund to the issuer of any bonus or other incentive-based equity-based compensation during the 12 month period following the first public issuance of the financial document.
- Refund any profits realized from the sale of securities of the issuer during the 12-month period following the first public issuance of the financial document.
Title IV of the SOX Act, Enhanced Financial Disclosures, includes the following topics.
- Disclosures in periodic reports
- Enhanced conflict-of-interest provisions.
- Disclosures of transactions involving management and principal stockholders.
- Management assessment of I/C.
- Certain exemptions.
- Code of ethics for senior financial officers.
- Disclosure of audit committee financial expert
- Enhanced review of periodic disclosures by issuers.
The SOX Act requires certain disclosures in periodic reports. those disclosures include 3:
- All adjusting entries identified by the public accounting firm reporting on the F/S.
- The F/S disclose all material off-balance sheet transactions including operating lease, contingent obligations, and relations with unconsolidated subsidiaries.
- Pro forma F/S shall include all relevant information and shall not include misleading or untrue information.
SOX includes certain enhanced conflict-of-interest provisions. Those provisions include:
Prohibitions on personal loans to executives with some exceptions.
The SOX Act includes provisions for disclosure of transactions involving management and principal stockholders. Those provision include:
Reporting by persons with ownership of 10% or more. Statements are filed at the time of registration, when a person achieves 10% and when there has been a change in ownership.
The SOX Act includes provision for management assessment of I/C. Those provisions include a report showing the following 3:
- Management’s assertion that it is responsible for adequate I/C structure.
- Management’s conclusions regarding its assessment of the effectiveness of the I/C structure and procedures for financial reporting.
- The auditor’s attestation regarding management’s assessment of internal control.
The SOX Act includes provision for audit committee disclosures. Those disclose include the following?
The issuer must disclose the existence of a financial expert on the committee or the reasons why the committee does not have a member who is a financial expert.
