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BEC2015 > Corporate Governance > Flashcards

Corporate Governance Flashcards

1
Q

What is the primary role of the board of directors?

A 
Primary role – 
•	Safeguard the company’s asset 
•	Ultimately maximize shareholder return
Another critical role is to manage principal-agent conflict that may exist between shareholders and management.
(To monitor management behavior.)
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2
Q

What is the specific duties of the board of directors?

A

• Election, removal, and supervision of officers (may remove officers without a cause);
• Adoption, amendment, and repeal of any bylaws;
• Set management compensation
• Initiate fundamental changes to the corporation’s structure.
The BoD has sole discretion to declare distribution to SH, including divs.

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3
Q

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

A

Appointment of the auditor
Compensation of the auditor
Oversight of the external auditor
a. Resolve disagreements between auditor and mgmt.
b. Accounting firm reports directly to AC
> AC must establish a complaint procedure

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4
Q

What is the duty of the compensation committee of the board of directors?

A

The compensation committee handles the CEO’s compensation package.

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5
Q

What does the NYSE and NASDAQ require of the board of directors?

A

They require the board to be independent.

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6
Q

What is the main goal in an executive compensation package?

A

The package should ensure that the goals of management should match those of the shareholders.

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7
Q

How can an executive compensation package ensure that goals of management align with those of shareholders?

A

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.

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8
Q

Which influences help mold the direction that management takes?

A

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

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9
Q

What is shirking?

A

When management doesn’t act in the best interest of shareholders.

It can be alleviated by tying compensation to stock performance or company profit.

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10
Q

What requirements are imposed on a public company under Sarbanes-Oxley?

A

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.

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11
Q

What characteristics are promoted by the COSO framework on Internal Control?

A

Reliable financial reporting

Effective and efficient operations

Compliance

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12
Q

What are the elements of the control environment?

A 
Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management's Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies
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13
Q

What are control activities?

A

A component of Internal Control that includes actions being taken to promote the control environment.

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14
Q

What are the basic elements of Internal Control?

A 
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
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15
Q

What is the significance of the Information and Communication aspect of Internal Control?

A

Management must have access to relevant and timely information to make good decisions.

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16
Q

How does Monitoring affect Internal Control?

A

Internal Control activities must be constantly monitored and evaluated for effectiveness.

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17
Q

What activities does the COSO framework for enterprise risk management include?

A 
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

18
Q

What are possible responses to risk under the COSO framework for enterprise risk management?

A

Avoid or Reduce

Share or Accept

19
Q

What is the authority of the BoD?

A

• No individual authority. It acts as group if quorum, then duly constituted.

20
Q

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

A

Oversees the board

Responsible for hiring new CEO

21
Q

What are the fiduciary duties of BoD?

A

Independent and Objective
Duty of Loyalty - BoD must always act in the best interest of the company. Success not insured.
Disclosure of Conflicts - Corporate Opportunity Doctrine

22
Q

What is theCorporate Opportunity Doctrine

A

if a director is presented with a business opportunity that is of interest to his company, the duty of loyalty prohibits the director from taking the opportunity for himself.

23
Q

What is the business judgment rule?

A

A director will not be liable to the corporation for acts performed or decisions made in good faith, if conducted in a manner that the director believes to be in the best interest of the corp. and with the care an ordinarily prudent person in like position. Directors will only be liable to the corporation for negligent acts or omissions (i.e. failure to obtain fire insurance, hiring a convict embezzler as treasurer)

24
Q

What does Title III - Corporate Responsibility addresses?

A

Public company audit committees
Corporate responsibility for financial reports
No improper influence on the conduct of the audit
Forfeiture of certain bonuses and profits

25
Q

SOX defines the criteria for the independence of audit committee members for issuers as including the following characteristics:

A

> Members of the audit committee, but shall otherwise independent
May not accept any consulting, advisory, or any other compensation or fees other than pursuant to their role on the Board.
May not be an affiliated person (can influence financial decisions)

26
Q

SOX requires that AC establish a complaint procedure that includes:

A
  1. Receipt, retention, and treatment of complaints regarding:
    a. Accounting
    b. IC
    c. Auditing
  2. Confidential or anonymous submissions by employees or issues regarding questionable accounting or auditing matters.
27
Q

What are the Corporate responsibility for financial reports under SOX III?

A

The CEO and CFO must sign certain representations regarding annual and quarterly repots, including their assertions that reports have been:
> read/reviewed
> Include no untrue statements
> FS are truly stated
> By signing they assert their responsibility for IC:
> By signing they assert certain disclosures to AC.

28
Q

CEO and CFO by signing report assume responsibility for internal control, including assertions that:

A
  • IC have been DESIGNED to ensure material info has been made available
  • IC have been EVALUATED for effectiveness as of a date within 90 days prior to the report
  • Report includes their conclusions as to the EFFECTIVENESS OF IC based upon their evaluation.
29
Q

CEO and CFO by signing report assert that they have made the following disclosures to the audit committee:

A
  • All significant deficiencies in the design or operation of IC
  • Any fraud, regardless of materiality
30
Q

No improper influence on the conduct of the audit clause under SOX III refers to

A

No officer or director, or any person acting under the direction thereof, may take any action that would fraudulently influence, coerce, mislead, or manipulate the auditor in a manner that would make the FS materially misleading.

31
Q

Forfeiture of certain bonuses and profits clause under SOX II refers to:

A

If issuer is required to prepare accounting restatement due to material noncompliance under the securities laws, the CEO and CFO may be required to reimburse the issuer for:
• Bonuses or incentive-based or equity-based compensation
• Gains on sale of securities during the 12-month period

32
Q

What does Title IV - Enhanced Financial Disclosures addresses?

A
  • Disclosures in periodic reports
  • Conflict of interest provision
  • Disclosure of transactions involving management and principal stockholder
  • Management Assessment of IC – Section 404.
  • Certain exemptions
  • Code of ethics for senior officers
  • Disclosure of Audit Committee “Financial Expert”
  • Enhanced review of period disclosures by issuers (by SEC)
33
Q

Arguments that BoD operates independently and has fulfilled its oversight function in accordance with the COSO

A

Disclosure in writing of any personal relationship
Disclosure of any material direct or indirect financial transaction w/ the company
There is a process where VP of the board reviews these disclosures and evidences his review via signature on the certification statement.
Prior to voting board members are reminded to vote independently
board member can recuse themselves from the vote
board minutes documents the actions of the board must be consistent w/ policy defined in the by-laws
auditors review minutes and by-laws to find evidence to support a conclusion on board oversight
Nominating committee identifies and screens potential board members. Evidence that the committee has performed their duties includes a review of background checks and written recommendations

34
Q

Arguments that BoD has fulfilled its oversight function in accordance with the COSO regarding monitoring risk:

A

Auditors will assess the board’s ability to monitor risk
One of the most powerful ways to demonstrate effective board oversight is to establish an empowered audit committee with the authority and responsibility to meet privately with internal and external auditors and respond directly to significant audit findings.

35
Q

Arguments that BoD has fulfilled its oversight function in accordance with the COSO and retains financial reporting expertise:

A

Staffing the audit committee with knowledgeable financial professionals such as CPAs provides additional comfort to auditors that the board has the capacity to understand the gravity of the issuers put before them.
Board containing at least one financial expert with expertise developed through education and/or experience.
Auditors have both the charter and by-laws to support the creation and empowerment of the audit committee, their selections and attention provides further support that the audit committee is actually performing the responsibilities assigned to it.

36
Q

Arguments that BoD has fulfilled its oversight function in accordance with the COSO and oversees audit activities:

A

Effective oversight can be obtained by:
> Reviewing the certification statements made by the audit committee which attest to review activities performed and decisions made.
> Board minutes document the adoption of new accounting policies and procedures.
> Auditors can examine whistle-blower logs to determine how complaints were handled and the timeliness of board responses.

37
Q

How the COSO - Internal Control Framework assists an entity’s management and BoD?

A
  1. Effectively applying IC within the overall organization
  2. Determining the requirements of an effective system
    of IC
  3. Allowing judgment and flexibility
  4. Identifying and analyzing risks
  5. Eliminating redundant, ineffective, or
    inefficient controls.
  6. Extending IC application beyond an organization’s
    financial reporting (efficient & effective operation
    compliance w/ laws)
38
Q

How the COSO - Internal Control Framework assists

Shareholders

A

a. Greater understanding of what constitutes an
effective system of IC
b. Greater confidence that management will be able to
eliminate ineffective, redundant, or inefficient
controls.
c. Improved confidence that the organization will
achieve objectives and will be able to identify,
analyze, and respond to risks affecting the
organization.

39
Q

What does Title IV - Enhanced Financial Disclosures addresses in Disclosures in periodic reports

A

The purpose it to promote - GAAP and transparency to the reader.
a. All material correcting adjustments identified by
the auditor should be reflected in the FS.
b. All material off-balance sheet transactions
should be disclosed:
• Operating leases
• Contingent obligations – lawsuits
• Relations with unconsolidated subs – related parties
c. Conformance of pro-forma FS to the following
requirements:
• No untrue statements
• No omitted material info
• Reconciled with GAAP basis FS
d. Use of special purpose entities (SPE’s)

40
Q

What is the independence requirement of Dodds Frank Act of 2010 for the board of directors?
Disclosure?

A

All members of the compensation committee of the board of directors must be independent

Must disclaim of why or why not the chairman of the board is also the CEO

41
Q

What is the independence requirement of NYSE?

A

A director is not independent if he receive $120,000 in payments, no including compensation for serving on the board, from the corp. in the 12 months period in the last 3 years.
A director is not independent if he has been employed by the corp. in the last 5 years
A director is not independent if he was a former parter with the corp.’s external auditor in the last 5 years.

42
Q

What serves as the staring point for control monitoring?

A

A baseline understanding of the system.

BEC2015 (15 decks)

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