Corporate Governance Flashcards
What is corporate governance
These are the systems that are applied to control and direct a corporation
What does the BoD do
- They are not directly involved in the operations
- They use compensation to incentive managers
- They also monitor management to make certain decisions are consistent with achieving the objectives
Cadbury report
This is a voluntary code for corporate governance
Co listed on London Stock exchange must comply or stay why not
What is included:
- clear division of responsibility at the top - CEO is not Chairmen of the board
- Majority of board member s should be outside directors
- Renumeration should be determined by non-executive directors
- Board selects an audit committee with 3 non-executive directors
What is the OECD and what are their principles of Corporate governance
Organization for economic Co-operation and development:
Six areas:
1) effective corporate governance framework - should be transparent and have clear division of responsibility
2) Shareholder Rights and Ownership Functions - the framework should protect the shareholders rights
3) Equitable Treatment of Shareholders
4) Disclosure and Transparency - these should be timely and accurate in all material matters
5) Board responsibility - these need to monitor management
What are the duties of the BoD
They have a fiduciary duty to:
- Act loyally and in the best interest of the corp.
- Act with Duty of Care - be diligent when making company decisions
- Act with Due Diligence - using reasonable care when entering into agreements
They are responsible for the missions and bylaws
They are responsible for strategic planning
They are responsible for selecting the CEO
They are responsible for securing the availability of financial resources
They have budget approval
They are accountable to stakeholders
They establish dividend policy
They are responsible for reacquiring treasury stock
NYSE BoD requirements
- Majority of director must be independent and must show proof of this
- Defines what makes them not independent
- Must meet regularly
- Must have a published code of conduct
- Must have an independant audit committee
What is the business judgement rule
This says that as long as a director was not doing fraud they can’t be held liable for the outcome of their decisions
What is the difference between an outside and an inside director
Outside - no involvement in the entity
Inside - is significantly involved in eh entity
What are the three committee that a publicly held company is required to maintain
Nominating Committee - who should serve on the BoD, CEO
Audit Committee - must have finance expert, responsible for the financial reporting process, hiring and compensating the auditors, dealign with whistleblowers
Compensation committee - what the executives get paid.
What is in Dodd Frank - what are the 4 significant provisions
Must disclose if CEO is the same person as the Chairmen of the Board and why
1) Say on Pay - stockholders can vote if they approve executive pay
2) Independence - Committee member must be independent
3) Disclosure - must disclose how executive compensation is related to company performance
4) Clawbacks - It a company is required to restate their F/S then there is a policy to recoup compensation
What is the difference between fixed and incentive compensation
Fixed - salary and perks
Incentive - Bonus and share based compensation (stock options, shared appreciation rights, restricted shares, performance share
What is the IIA and the IPPF
IIA - Institute of Internal Auditors
IPPF - International Professional Practices Framework
the IIA established the IPPF -
It have 3 components:
1- Definition of Internal Auditing
2-The code of Ethics
3- ISPPIA - International Standards for the professional Practice of Internal Auditing
What is the definition of internal auditing
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations
What is in the IIA’s code of ethics
Principles and Rules
Principles: Integrity, Objectivity, Confidentiality, Competency
Rules are under each
What are the ISPPIA
They have attribute standards and performance standards
Attribute:
-purpose, authority, responsibility
- Independence and Objectivity
- Proficiency and Due Professional Care
- Quality assurance and Improvement Program
Performance Standards- 7 categories
1) manage the internal Audit Activity
2) Nature of work
3) Engagement Planning
4) Performing the engagement
5) Communicating results
6) Monitoring Progress
7) Communicating Acceptance of Risks
What is the function of the division of Corporate Finance
They provide guidance in regard to the Securities act of 1933, Securities and Exchange Act of 1934, Trust Indenture Act of 1939, and SOX
What is the role of the Division of Enforcement
To investigate possible securities violations
What is the role of the Office of Chief Accountant
They are responsible for the transparency and relevancy of financial reporting
What is the JOBS ACT
Jumpstart Out Business Startups
helps small businesses
What is occupational Fraud
Thi sis the use of your occupation for personal gain through the deliberate misuse of the organizations resources or assets
What are the 5 steps in FRMP
1) establish governance policies
2. Conduct risk assessment
3. Plan and execute preventative and detective control processes
4. Perform timely and confidential investigations
5. Monitor and assess the program
Why have a FRMP program
Helps the BoD satisfy Duty of Care for stakeholders
Helps stakeholders confidence
- Enhance employee morale
- Help entity survival (image, profitability)
Audit Committee
They are members of the board, but not part of the day to day operations
What are articles of incorporation
These are the companies charter
name of company
address
The purpose of the corporation
Name of the registered agent (your lawyer)
Number of shares authorized and type of stocks
What are the fiduciary duties of the BoD:
Act Loyally
Act with Duty of Care
Act with Due Diligence
The BoD has a fiduciary duty to act loyally in the best interest of to the company
Act Loyally
So if you are offered a business opportunity you need to bring this to the attention of the board - if they pass then you can do it
Duty of care - be diligent when making company decisions
Act with Due Diligence - using reasonable care when entering into agreements or transactions
What are the three committees of a BoD is required to have?
Nominating Committee - oversee succession of CEO
-Chair of board also the CEO? must be disclose and if so the reasons why. Inside director
Audit Committee - must have 1 be a financial expert - not a CPA. If not they must say why. Oversee of F/s prep and external auditors.
Compensation Committee: All require to assume certain responsibility. They need to establish a compensation philosophy. They have to listen to shareholders about the compensation package.
Say on Pay - shareholder vote if they approve of the compensation and how often vote
Independence - committee must be independent
Disclosures - must disclose the CEO’s compensation and if performance based - how and why
Clawbacks - if the co has to restate f/s - then they can go back and get compensation back from CEO
What is the business Judgement Rule
When a director fulfills their fiduciary duty to the entity by acting in good faith, being loyal and applying due care - they are not liable for decisions as long as they are not guilty of fraud
regardless of the outcome
regardless if the decisions was questionable
3 components of IPPF - Internal auditors- developed by COSO
- Definition of Internal Auditing: IA is an independent objective assurance and consulting activity designed to add value and improve organizations operations
- Code of Ethics - thes are the principles that internal auditors are expected to uphold and rules to follow :
principles (Integrity, Objectivity, Confidentiality, competency)
3 ISPPIA - International Standards of the Professional Practice of Internal Auditing
- 4 Attribute standards
- Purpose
- Independence/Objectivity
- proficiency and Due Prof. care
- Quality Assurance and Improvement
7 Performance standards
- Managing Internal Audit Activity
- Nature of the work
- Engagement Planning
- Performing the engagement
- Communicating results
- Monitoring progress-
- Communicating the acceptance of Risk
What are the inherent limitations of an Internal Control System
COCO
Collusion
Override by Management
Competence / Cost Benefit
Obsolescence - change in Co operations or size
what is CRIME
Control Activities Risk management Information and Communication Monitoring Control Environment
What are Control Activities
These are policies and procedures to mare sure management’s intention are carried out
PIPS:
Performance Reviews (actual vs budget, P/Y, financial vs nonfinancial
I- Information processing (general controls over technology)
P - Physical Controls - Access to Assets
S - Segrations of Duties - ARCCS
authorization, recording, custody, comparisons
these are deployed through policies and procedures
What are Risk Assessments
thi sis the identification, Analysis, and Management of Risk in the prep of F/S
- objectives are clear to allow identification of eval of risks
- Risks are identified and analyzed
- Consider the possibility of fraud
- The impact on the effectiveness of I/C
What are Information and Communications
This is how management obtains or generates and uses information and how it is discriminated throughout the entity
- Uses relevant information
- Communicates internally
- Communicates externally
What is Monitoring
Are all of the Internal Controls that have been put in place are functioning as intended
- monitor on an ongoing basis
- communication of findings and deficiencies on a timely basis
What is Control Environment
CHOPPER This is the environment or tone at the top. It is the foundation of internal control
C - commitment to Competence
H- Human resources policies and procedures
O - Organizational structure - is it in place - clear line of reporting and communication
P -Philosophy and Operating Style of Management - unethical management can lead to unethical employees
P - Participation of Board of Directors or audit committee - play key role in establishing I/C
E - Ethical and Integrity Values - established through a code of conduct, etc
R - Responsibility and authority assignment - personnel have clear understanding of their responsibilities and the rules and regulations
