Corporate Governance Flashcards
Which of the following is NOT one of the core principles of sound corporate governance?
A. Responsibility
B. Fairness
C. Transparency
D. Independence
D. Independence
Most systems of corporate governance are focused on several core principles or values, which include: • Accountability • Transparency • Fairness • Responsibility
The purpose of corporate governance is to:
A. Provide reasonable assurance regarding the organization’s compliance with applicable laws and regulations.
B. Ensure the accuracy and reliability of the organization’s financial reports.
C. Prevent and detect financial misstatements, whether caused by errors or fraud.
D. Encourage the efficient use of resources and require accountability for the stewardship of those resources.
D. Encourage the efficient use of resources and require accountability for the stewardship of those resources.
Sir Adrian Cadbury, chairman of the committee that developed the foundational corporate governance guidance The Cadbury Report, stated that the purpose of corporate governance is “to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society.”
The boards of directors of companies that are listed on the NYSE or NASDAQ must be composed of a majority of independent directors. T/F
True
Companies with securities listed on the NYSE are bound by the corporate governance requirements contained in the NYSE Listed Company Manual; similarly, the corporate governance standards issued as part of the NASDAQ Equity Rules apply to all entities with securities listed on the NASDAQ exchange. Both the NYSE and the NASDAQ rules state that a majority of the directors on a listed company’s board must be independent.
Specific corporate governance practices for publicly traded U.S. corporations are mandated by the Uniform Corporate Governance Act. T/F
False
In the United States, corporate governance requirements are found in legislative and regulatory requirements imposed upon corporations. Each state has laws governing those corporations that are registered in it. Additionally, public companies are subject to federal legislation, as well as regulation by securities industry oversight bodies. The most significant corporate governance requirements for these companies are found in the Sarbanes-Oxley Act, as well as in the rules laid out by the New York Stock Exchange (NYSE) and NASDAQ for companies listed on those markets.
There is no U.S. law called the Uniform Corporate Governance Act.
Under the Sarbanes-Oxley Act, members of the audit committee can be paid for consulting work done for the company, but only if the transaction is documented and conducted at arm’s length. T/F
False
Under the restrictions imposed by the Sarbanes-Oxley Act, all audit committee members must be members of the board of directors and must be “independent,” meaning they receive compensation only for their service on the board. They cannot be paid by the company, or any of its subsidiaries, for any other consulting or advisory work, including indirect payments made by the company to a party related to the committee member.
According to the requirements of the Sarbanes-Oxley Act, which of the following parties is responsible for establishing procedures to handle complaints regarding irregularities in a publicly traded company’s accounting methods, internal controls, or auditing matters?
A. Executive management
B. The internal audit function
C. The external audit firm
D. The audit committee
D. The audit committee
The Sarbanes-Oxley Act has several provisions that set out specific requirements for the audit committees of public companies. Specifically, the audit committee has the sole responsibility for hiring, overseeing, and paying the external auditors and for resolving any disputes that arise between the auditors and management regarding financial reporting issues. The audit committee is also required to establish procedures (e.g., a hotline) for receiving, retaining, and dealing with complaints, including confidential or anonymous employee tips, regarding irregularities in the company’s accounting methods, internal controls, or auditing matters. Additionally, the committee is required to pre-approve all services to be performed by the external auditors. While the audit committee may consult with outside advisors, it is not required to approve those advisors hired by management.
The Sarbanes-Oxley Act requires that each member of a company’s audit committee be independent with respect to the company. Which of the following is NOT a violation of the independence requirements for audit committee members?
A. The receipt of pension benefits from previous employment with the company
B. The receipt of legal consulting fees from the company
C. Serving as the CEO of a subsidiary of the company
D. Ownership of 18 percent of the voting stock of the company
A. The receipt of pension benefits from previous employment with the company
Audit committee members must be independent of the company with respect to two criteria: fees and affiliation.
Audit committee members may only be compensated for their services on the board and any board committee. They cannot be paid by the company, or any of its subsidiaries, for any other consulting or advisory work. However, audit committee members may receive any fixed retirement benefits they are entitled to for prior service with the company, as long as the benefits are not contingent upon the members’ continued service.
Additionally, audit committee members cannot be “affiliated persons” of the company or any of its subsidiaries. A safe harbor provision excludes members from being considered an affiliated person as long as they are not an executive officer of the company or any of its subsidiaries and they are not a shareholder of 10 percent or more of any class of voting stock of the company or any of its subsidiaries.
The Treadway Commission was established with the purpose of defining the responsibility of the auditor in preventing and detecting fraud. t/f
t
The National Commission on Fraudulent Financial Reporting (commonly known as the Treadway Commission) was established in 1985 with the purpose of defining the responsibility of the auditor in preventing and detecting fraud. The commission was formed and sponsored by the five predominant professional auditing organizations at the time—the American Institute of Certified Public Accountants, The Institute of Internal Auditors, the American Accounting Association, Financial Executives International, and the Institute of Management Accountants.
The term \_\_\_\_\_\_\_ refers to the oversight responsibilities of different parties for an organization’s direction, operations, and performance. A. Corporate governance B. Risk management C. Fraud risk assessment D. Corporate compliance
A
The OECD Principles of Corporate Governance are required to be implemented by all corporations in the jurisdictions that have officially adopted them. t/f
f
The OECD Principles of Corporate Governance is regarded as one of the hallmark sources of guidance for corporate governance practices for organizations throughout the world. The principles are non-binding, as their implementation must be adapted to different legal, economic, and cultural circumstances. This is a key strength of the principles that makes them a useful tool worldwide, both in developed economies and in emerging markets.
