Chapter 2 - Corporate Governance/InternalControl/ERM

Question 1

Articles of Incorporation include

Answer 1

• Name of company
• purpose
• name of registered agent of the corporation
• name and adress of each incorporatior
• # of authorized shares
• types of shares
• address at time of filing

*** Becomes a Corporate Charter when approved

Question 2

Bylaws are

Answer 2

Basically the internal rules of an organization. Include things like:

• Minimum and maximum numbers of directors
• how they are to be selected and compensated
• how often they are to meet
• nature of their responsibilities

Question 3

Board of Directors duties are:

Answer 3

FIDUCIARY.

“The board of Directors have a fiduciary duty to:

1. Act Loyally
2. Act with a Duty of Care
3. Act with Due Diligence”

Question 4

BOD’s fiduciary duty to act loyally

Answer 4

They should act in the best interest of the corporation and shareholders. They shouldn’t put personal economic interest over that of the company’s. Thus, if they ask about a director getting an opportunity (like in question 2c-1), the director should first present that opportunity to the company. If the company rejects it, then perhaps the director can accept said opportunity

Question 5

Other duties of the BOD (not including three fiduciary duties)

Answer 5

• Determining and revising mission statement
• amending bylaws
• strategic planning - development of broad objectives and policies
• selection and oversight of the chief executive
• securing availibitlity of financial resources
• Approval of budget, major operating and financial proposals
• providing advice to management and determining its compensation
• establishing dividend policies
• reacquiring treasury stock

Question 6

Business judgement rule

Answer 6

Unless guilty of fraud, a director has some protection against liability if a presumption that in making a business decision, he or she acted on an informed basis, in good faith, and in the honest belief that the action was in the best interests of the company.

Question 7

Any amount of committees can be on a BOD, but which three are required for public companies?

Answer 7

1. Audit
2. Compensation
3. Nomination

Question 8

What does Dodd-Frank require in regards to the BOD?

Answer 8

Requires a compapny to disclose whether its chair of the BOD is also the CEO. Must also indicate the reasons he or she is or isnt

Question 9

Financial Expert

Answer 9

Need NOT be a CPA, but:

• has an understanding of GAAP and financial statements
• Experience in preparing statements
• experience with internal accounting conrols
• understanding of the functions of the audit committee

Question 10

The 5 Internal Control policies, which contain the 17 coso components are

Answer 10

CERCIM

1. Control Environment
2. Risk Assessment
3. Control Activites
4. Information gathering and communication
5. Monitoring activities

Remember, people could be CERCIMsized if they don’t consider internal control. (Gross but you’ll remember it)

Question 11

Which of the following is NOT part of the 5 IC components?

A. Control Activities

B. Control Risk

C. Control Environment

Answer 11

B - Control Risk. That has to do with Audit Risk.

Question 12

IM IN LOVE WITH DA COCO

Answer 12

COCO - 4 Inherent Limitations:

Collusion

Override

Competency

Obsolescence

Question 13

When changing processes, in order to make certain a change does not have any adverse effects, what are the absic control change policies?

Answer 13

1. Change Requests - identifying when change is needed or desired
2. Change Analysis - Evaluating whether the chang eis justified or not; looking at costs and benefits
3. Change Decisions - deciding on the change
4. Planning and Implementing the change - seeing how it affects existing processes too
5. Monitoring and Tracking the Change - make sure it’s implemented and having the intended effects

Question 14

Purpose of ERM

Answer 14

to find the balance between minimizing or managing risk, and maximizing the return and opportunities that can be provided to stAKEholders (not nec stockholders)

Question 15

8 components of ERM

Answer 15

1. Internal Environment - sets the tone at the top
2. Objective Setting - Strategic/Operational/Reporting/Compliance objectives
3. Event Identification - occurence (or the lack of) of certain events
4. Risk Assessment - Balance Sheet approach or Process approach
5. Risk Response - see card
6. Control Activities
7. Information and Communication -
8. Monitoring

Question 16

Risk Response -(SARA)

Answer 16

1. Acceptance - take no action and simply let the risk occur
2. Reduction - modifiying an internal process. Also called “mitigation of the risk”
3. Avoidance - completely changing an internal rpocess, stopping selling something or selling to a certain person, etc depending on what the problem is
4. Sharing - insurance, fidelity bonds, outsourcing

Question 17

Principles of Control Activities (#2s-16)

Answer 17

1. Selection and development of control activties that contribute to reducing risks
2. Policies identify expectations and procedures to CONVERT POLICIES INTO ACTIONS
3. General controls over technology are developed to support the achievement of the entity’s objectives

Question 18

Objective Setting component of ERM - ROC

Answer 18

3 main categories of objectives:

1. Reporting - Ensuring accounting principles adhere to correct framework, such as GAAP
2. Operational - Things like ensuring budgets are met, maintaining material price variances within pubslihed guidelines, etc
3. Compliance - Adherence to laws and Regulations: Examples are maintaining a safe level of CO2 Emissions during production, etc

Question 19

“A company uses its company-wide cost of capital to evaluate new capital investments. What is the implication of this policy when the company has multiple operating divisions, each having unique risk attributes and capital costs?”

Higher-risk divisions will over-invest in new projects and low-risk divisons will under-invest

Answer 19

What’s company wide cost of capital? This issue concerns any firm with two or more divisions that differ in risk from each other. As each division considers investment opportunities, it must use an interest rate (cost of capital) to evaluate the effects of expected cash flows in differing time periods. This interest rate is also called a “cutoff” rate. It is the minimum rate of return acceptable for projects in that division.

The company can choose between a:

Firm-wide versus divisional cost of capital.

If a multidivisional firm uses a firm-wide cutoff rate, this rate will seem too high for low-risk divisions and too low for high-risk divisions. Think about it - If the rate is 10 percent, low-rsik divisions won’t have many projects like that. High-risk divisions will have projects with risks much higher. Thus: the firm will accept bad high-risk projects and reject good low-risk projects.

Question 20

According to COSO, the four categories of entity objectives in the enterprise risk management framework include each of the following, except

Answer 20

Implementation of itnernal control