Corp. Governance-becker Flashcards
What is the role of BOD?
- Safeguard company’s assets
-maximize shareholder return - Fiduciary responsibility
- due diligence- not liable for acts if ethical
- cannot compete but could have conflict of interest
..this requires full disclosure prior to transaction
.. Deals have to be fair to company
What is the responsibility of BOD?
- manage mangers in best interest of the company
- no individual authority “quorum” - power as group
What is indemnification?
If sued. The company pays for and hires a lawyer as long as the action was in good faith
Who are officers and what are their responsibility?
- individual agents
- can be removed without cause
- actual authority ( oral & written)
- apparent authority; their role to act on behalf of the corp.
- indemnification
- fiduciary responsibility : good faith of the company
Can officers be BOD?
Yes. But the majority of the board should be independent
- Officers are not required to be shareholders
What does SOX enforce?
- corporate responsibility
- enhance financial disclosed
- Fraud
What is corporate responsibility under SOX?
- audit committee
- select oversee, compensate audits
- auditor report directly to audit committee
- resolve dispute between officers and auditors
- are BOD but is independent otherwise
- establish whistle blower procedures to accept complaints
What is the corporate responsibility for Officer (CEO/CFO)?
- sign and review all reports
- no omission of material facts
- responsible for internal controls
- transparent
- no improper influences (bribery to audit)
What happens if financial statements get restated due to omission or non compliance?
- Company takes it out of the bonus
- is sold stock and have gain, the gain goes back to the company
What are SOX’s enhanced financial disclosures?
Disclosures of 10k and 10q
- ensure compliance with GAAP
- all material correcting adj. identified by audit req. disclosure
- off balance sheet transaction should be disclosed
What are some off balance suggest transactions that should be disclosed?
- operating lease
- contingent liabilities
- related party transactions
- special purpose entities
Restriction for issuers?
Prohibited from making loans to executive officers & directors unless it’s the company’s ordinary course of business
What is SEC roles?
- Enhanced review of disclosure for completeness
- ensure independence
How does SOX address fraud?
Up to 10-20 years in jail if violated -alteration of documents ( distort, impede ( stop investigation)) Failure of officer to sign= penalties Corp fraud= 20 years Known misstatement = 10 years Intentional= 20 years
SEC actions against fraud
Freeze assets
Prohibit BOD / officers to serve
Any retaliation against whistleblower = 10 years
What is COSO for internal controls?
Private sector that established initiative to help managers and stockholders understand internal controls.
What are the 3 major objectives of internal control?
O- operation objectives: effectiveness & efficiency of entity’s operation
R- reporting objectives: reliability, timeliness & transparency of financial statements
C- compliance: comply w/ laws and regulations
What are the 5 major components of internal control?
C- Control environment- EBOCA R- Risk assessment- EAR I- Information and Communication- FACT M- Monitoring E- Existing Controls
What is control environment in CRIME?
E- Ethics and integrity B- Board independence of management O- Organizational Structure C- commitment to Compliance A- Authority and Accountability
Process structure standards that provide the foundation for entities to establish a system of internal controls
What is Risk assessment in CRIME?
E- Event Identification
A- Assess Risk
R- Respond to Risk
Identify and analyze risk
Consider potential for fraud
What is Information and communication in CRIME?
F- Fair
A- Accurate
C- Complete
T- Timely
Internal communication: audit committee, management & BOD
External communication: users
What is Monitoring in CRIME?
Assess internal control overtime by assessing the designs and operations of controls on a timely basis
Correct deficiency
Frequently testing and detect risk
Report deficiency
What is Existing control activities in CRIME?
Controls that are in placed to Detect and prevent
Mitigate risk
What is COSO enterprise risk management?
ERM helps strategize- balance risk and return
ERM assist organizations develop comprehensive response to all risk management
COSO ERM summarized.
- identify events
- mange risk
- provide reasonable assurance
- align risk appetite strategy
- enhance risk response
- reduce operational surprise/ losses (event identification)
- improves development of capital (max efficiency & effectiveness)
What are the 4 categories of ERM objectives?
S- Strategic O- Operation R- Reporting C- Compliance "Broader in scope- beyond internal control"
7 ERM components?
I- Internal environment- EBOCA HR (CRIME- C) S- Setting objectives - SORC E- Event ID- EAR (CRIME- R) A- Assessment of Risk - EAR (CRIME- R) R- Risk Response- EAR (CRIME- R) A- control Activities (CRIME- E) I- Information and communication (CRIME- I) M- Monitoring (CRIME- M)
ERM Internal Environment?
E- commit to Ethical values and integrity B- Board oversight O- Organizational structure C- commitment to Competence A- Accountability
HR- Human resource
- risk management philosophy
- human resource standards
- risk appetite -aggressive vs. conservative
ERM - Setting objectives
SORC
strategic objectives, operations, reporting and compliance
ERM- Event ID (Ear)
Internal and external risks
Negative risk= risk: prevent achievement of objectives
Positive risk= opportunities: promote achievement of objectives
ERM- Assessment of risk (eAr)
Measure the probability or severity of occurrence
Inherit risk- management does nothing
Residual risk- management does something
Assessment of risk techniques?
- Benchmarking
- probabilistic model- statistical data
- non- probabilistic- opinion ex: outcome of lawsuit
ERM Risk Response (EaR)
Must align risk with company’s appetite : conservatism vs. aggressive
Risk Response:
- avoidance: discontinue
- reduce: mitigate- invest
- acceptance: do nothing, because not cost effective
- sharing: transfer of risk, insurance
ERM- control activities
- types of actives in place
- variance analysis- top level reviews
- performance reports
- physical control- safeguard of assets
- red flags, performance indicators
- segregation of duty
ERM Information and communication?
FACT
Communication with internal and external, customers feedback, supplier communication
ERM- Monitor
- ongoing monitoring activities
- dictated by risk
- verify effective operation controls
- separate evaluations
- internal control audits (multiple checks and balance)
- report/ correct deficiency
- through normal chains of command
- blow the whistle
