Business 1: Corporate Governance Flashcards
Does the BOD have individual authority?
- No
- Must act as group if quorum present
What is the primary role of an entity’s BOD?
- Safeguard co assets
- Maximize shareholder return
Who has the sole discretion to declare distributions to shareholders, including dividends?
BOD
Directors must always act in the best interests of the corporation because they are ________ of the corporation.
Fiduciaries
The duty of loyalty prohibits directors from _______ with the corporation.
Competing
The articles of incorporation may eliminate or limit a director’s liability to the corporation for money damages for action taken as a director except to the extent of actions taken in _____ _____.
Bad faith
Officers are _____ of the corporation who ordinarily manage its day-to-day operations and may bind the corporation to contracts made on it behalf.
Individual agents
May the BOD remove an officer with or without cause?
YES
What two types of authority does an officer have?
- Actual (oral/written instruction)
- Apparent (title CEO/CFO)
Officers also may serve as directors, but good corporate governance would require what?
- Majority of BOD should be independent
SOX addresses what three key topics?
1) Corporate responsibility
2) Enhanced financial disclosures
3) Fraud
SOX Title III addresses what?
Corporate responsibility (audit committee and CEO/CFO representations)
SOX Title III. Audit committee members are to be members of the issuer’s BOD but are to be otherwise what?
Independent
SOX Title III. Who must sign certain representations regarding annual and quarterly reports?
CEO and CFO
SOX Title IV addresses what?
Enhanced financial disclosures (internal controls and audit committee)
What does COSO stand for?
Committee on Sponsoring Organizations
Who uses the COSO framework?
Used by
1) Management/board
2) Stockholders
Is the Internal Control - Integrated Framework rules-based?
- NO, it is principles-based
What are the three categories of objectives within the Internal Control - Integrated Framework?
ORC
1) Operations Objectives
2) Reporting Objectives
3) Compliance Objectives
Which of the three objectives within the Internal Control - Integrated Framework is the focus of COSO?
Reporting objectives
COSO IC-Integrated Framework. What do the operations objectives relate to?
- Relate to effectiveness and efficiency of an entity’s operations
- Includes financial and operational performance goals
- Ensures that assets of organization are adequately safeguarded against potential losses
COSO IC-Integrated Framework. What do the reporting objectives relate to?
- Pertain to reliability, timeliness, and transparency of an entity’s external and internal financial and nonfinancial reporting
- As established by regulators, accounting standard setters, or the firm’s internal policies
COSO IC-Integrated Framework. What do the compliance objectives relate to?
- Established to ensure entity is adhering to all applicable laws and regulations
What are the five integrated components of internal control?
CRIME
1) Control environment
2) Risk assessment by management
3) Info and communication systems
4) Monitoring
5) Existing control activities
What do the five integrated components of internal control apply to?
Applies to all 3 categories of entity objectives “ORC”
COSO IC-Integrated Framework. What are the five principles related to the control environment?
EBOCA
1) Commitment to ETHICS and integrity
2) BOARD independence and oversight
3) ORG structure
4) COMMITMENT to competence
5) ACCOUNTABILITY
COSO IC-Integrated Framework. What are the three principles related to risk assessment?
EAR
1) Event identification
2) Assess risk
3) Respond to risk
COSO IC-Integrated Framework. What are the three principles related to information and communications?
1) Obtain and use info
2) Internally communicate info
3) Communicate with external parties
COSO IC-Integrated Framework. What are the two principles related to monitoring activities?
1) Ongoing and/or separate evaluations
2) Communication of deficiencies
COSO IC-Integrated Framework. What are the three principles related to existing control activities?
1) Select and develop control activities
2) Select and develop technology controls
3) Deploy through policies and procedures
True or False:
There is a direct relationship between an entity’s three objectives, its five integrated internal control components, and the organizational structure of the entity.
TRUE
The COSO IC-Integrated Framework requires what in designing, implementing, and conducting IC and in assessing the effectiveness of IC?
Judgement
In 2004, the COSO issued ERM-Integrated Framework to assist organizations in what?
Developing a comprehensive response to risk management
ERM defines enterprise objectives in what four categories?
S+ORC
1) Strategic
2) Operations
3) Reporting
4) Compliance
What are the eight components of ERM?
IS EAR AIM
1) Internal environment
2) Setting objectives
3) Event identification
4) Assessment of risk
5) Risk response
6) Control activities
7) Information and communication
8) Monitoring
COSO ERM-Integrated Framework. The internal environment is supported by what eight key elements?
EBOCA HR
1) Commitment to ETHICAL values and integrity
2) BOARD oversight
3) ORG structure
4) COMMITMENT to competence
5) ACCOUNTABILITY
6) HR (risk management philosophy, HR standards, risk appetite)
COSO ERM-Integrated Framework. Objective setting is supported by what four key elements?
S+ORC
1) Strategic objectives
2) Operations objectives
3) Reporting objectives
4) Compliance objectives
The management philosophy and operating style principle of the control environment component of IC integrated framework suggests strong controls and encourages what?
Management’s attitudes to be congruent with strong financial controls
What is the primary benefit of having a financial expert on a company’s audit committee?
The enhanced level of financial sophistication of the financial expert can serve as a resource for the audit committee
SOX requires that the officers of a corporation be held accountable to a code of ethics. Codifications of ethical standards should include provisions for what?
- Honest and ethical conduct
- Full, fair, accurate, and timely disclosure of periodic F/S
- Compliance w/ laws, rules, and regulations
SOX seeks to improve investor confidence by providing greater transparency for what types of issues?
- Adequacy of IC
- Compliance of senior officers with code of ethics
- Competency of audit committees
The Treadway Commission was established to study factors that lead to fraudulent financial reporting. The Treadway Commission was established by whom?
Private sponsoring organizations (COSO is sometimes referred to as the Treadway Commission after its original Chairman James Treadway Jr.)
ABC Corporation owns many businesses along the coast of Florida. The company’s management had identified business interruption events as a potential risk resulting from storm damages caused by hurricanes. Management is so fearful of the possibility of storm damage that they elect to divest the company of virtually all properties on the Florida coast. ABC’s response to potential risks is known as what?
Avoidance
ABC Corporation owns many businesses along the coast of Florida. The company’s management had identified business interruption events as a potential risk resulting from storm damages caused by hurricanes. ABC elects to insure its properties and “buy down” standard deductibles with additional premium. ABC’s response to potential risks is known as what?
Sharing (insuring against losses or entering into joint venture to address risk is known as risk sharing)
When management uses listings of potential events common to a specific industry as a means of identifying risks or opportunities, the method is known as what?
Event inventory
Gathering management together to discuss or even brainstorm ideas in a structured manner is known as what?
Facilitated workshop
Sending out questionnaires to affected parties requesting opinions on potential events is the what approach?
Questionnaire/survey approach
A flow chart of activities used to identify potential risks is a what analysis?
Process flow analysis
Objectives are aligned with risk appetite, which drives what?
Risk tolerance levels
Control activities are most closely related to what?
Risk responses
For the components of ERM to be functioning effectively, there cannot be what?
Material weaknesses in IC
What is the criteria for evaluating the effectiveness of ERM?
Components of ERM framework
According to COSO, the use of ongoing and separate evaluations to identify and address changes in IC effectiveness can best be accomplished in which stage of the monitoring for change continuum?
Change identification
The COSO identifies what four stages of the change continuum?
1) Control baseline
2) Change identification
3) Change management
4) Control validation/update
True or false.
The existence of a published code of ethics and a periodic acknowledgement that ethical values are understood is evidence of development of ethical values and ensuring that those values are understood and taken seriously.
True
Periodically comparing and updating the mission, vision and values of a not-for-profit would best be classified as what sort of activity?
Monitoring activity
Conducting focus groups would most likely be what type of objective?
A related operating objective (focus groups would id the needs of various stakeholders and be used to improve operations)
Does a director’s self-dealing automatically void a contract?
NO (contract can be upheld if it was fair)
What does the human resources principle say?
That HR policies and procedures should be fully compatible with effective financial reporting and internal control
Management of a company has a lack of segregation of duties within the application environment, with programmers having access to development and production. The programmers have the ability to implement application code changes into production w/o monitoring or a quality assurance function. This is considered a deficiency in what?
Change control
