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Corporate Governance And Operations Management > Corporate Governance > Flashcards

Corporate Governance Flashcards

0
Q

Do the board members have sole discretion of distributions?

A

Yes, this includes, dividends, in the form of cash, property, or the corporations own shares.

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1
Q

Specific duties of the board of directors

A

Elect, remove and supervise officers. Adopt, amend, and repeal the bylaws, fixing management compensation and initiating fundamental changes to the corporate structure.

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2
Q

Fiduciary duties of the board of directors

A

Act in best interest of company, good faith, ethically.

  1. Right to rely
  2. Liability for unlawful distributions
  3. Duty of loyalty
  4. Corporate Opportunity Doctrine
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3
Q

What is the right to rely for BOD?

A

Part of the directors due diligence obligation. The BOD rely on information provided by: corp officers, employees, legal council, accountants, etc

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4
Q

What is liability for unlawful distributions for BOD?

A

Dividends

  1. Allow the company to go bankrupt.
  2. Corp total assets are less than its liabilities
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5
Q

What is duty of locality? For the BOD

A

Directors owe their corporation a duty of loyalty and must act in the best interest of their corporation.
You cannoT serve on the board of a competing entity
Must disclose all conflicts and should abstain - liable if unfair

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6
Q

What is corporate opportunity doctrine for BOD?

A

If the director is presented with a business opportunity that is of interest of his corporation, the duty of loyalty prohibits the director from taking the opportunity for himself, unless presented to the corp and it is rejected then he personally can take the opportunity.

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7
Q

What is indemnification?

A

Corporations are allowed to indemnify directors for expense for any lawsuits brought against them in their corporate capacity.

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8
Q

Limitation on director liability?

A

If the BOD works in Bad Faith / unethically they will not have indemnify and will be subject to money damages for their actions.

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9
Q

What are the officers definition and duties?

A

The officers are individual agent who conduct day to day operations.

  1. Selection and removal by the BOD
  2. Authority
  3. Fiduciary duties and indemnification
  4. May serve as a BOD
  5. Not required to be shareholders
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10
Q

Officers ability for selection and removal by the BOD?

A

Officers are selected by the BOD and may be removed by the BOD with or without cause.

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11
Q

Two types of officer authority?

A
  1. Actual= oral and written instruction

2. Apparent “title” CEO / CFO

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12
Q

Officers fiduciary duties

A

Are subjuct to fiduciary duties and must discharge their duties in good faith (ethically).

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13
Q

Can officers serve as directors?

A

Yes, but good corporate governance - majority of the board should be independent.

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14
Q

The 3 important things about SOX

A
  1. Corporate responsibility
  2. Enhanced financial disclosures
  3. Fraud
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15
Q

SOX- Title III- corporate responsibility consist of what two areas?

A
  1. Audit committee - role and needs

2. CEO / CFO representations

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16
Q

SOX- public company audit committee is responsible for what?

A
  1. The committee is directly responsible for the appointment, compensation, and oversight of the work of the public accounting firm employed by the public company & resulting disputes
  2. Members of the BOD- but otherwise independent
  3. Establish procedures to report complaints.
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17
Q

SOX- corporate responsibility for financial reports?

A 
Key officers- CEO & CFO
Must sign & assertion:
1. Reviewed
2. Statement fairly present
3. Internal control assertions
4. Disclosures
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18
Q

SOX-enhanced financial disclosures are?

A

Application of GAAP & transactions are transparent.

  • All material correcting adjustments identified, f/s disclosed
  • conflict of interest provisions
  • related party transactions
  • management assessment of internal controls
  • code of ethics
  • disclosure of audit committee financial expert
  • enhance review of periodic disclosures by issuer
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19
Q

What is management assessment of internal controls under the SOX enhanced financial disclosures?

A

IC framework:
Each annual report is required to contain a report that includes:
Statement of responsibility & effectiveness.

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20
Q

Code of ethics for senior officers in SOX enhanced financial disclosures?

A

Tone at the top / control environment

Issuer must disclose weather or not the issuer has adopted a code of conduct for senior officers.

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21
Q

What are the Disclosures of audit committee financial expert in enhanced financial disclosures of SOX.

A

Issuer must disclose the existence of a financial expert on the committee of the reason why the committee does not have a member who is a financial expert.

  • ” liberal” not specific qualifications
  • knowledge must include: GAAP, experience in prep of F/S, internal controls and understanding the audit committee functions
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22
Q

Enhanced review of periodic disclosures by issuers by the SEC in enhanced disclosures of the F\S for SOX?

A

The SEC should consider:

  • high risk
  • high motivation
  • material to market
  • large banks that have impact on the entire economy.
23
Q

Four corporate and criminal fraud accountability within SOX?

A
  1. Criminal penalties for altering documents: intent to impede, obstruct, or influence an investigation.
  2. Securities fraud: No later than the earlier of two years after the discovery of the facts or five years after the violation.
  3. Whistle-blower protection
  4. Criminal penalties for securities fraud
24
Q

What does COSO stand for?

A

Committee on Sponsoring Organizations - financial reporting

25
Q

What is the COSO internal control- integrated framework?

A

To assist organizations in developing comprehensive assessments of internal control effectiveness. The standard for best practice.

26
Q

What is the definition of internal control?

A

Process to provide reasonable assurance.

27
Q

What are the objectives of internal controls?

A
  1. Reliability of financial reporting
  2. Effectiveness and efficiency of operations
  3. Compliance with applicable laws and regulations
28
Q

Five Components of internal controls?

A

C- control environment: the overall tone of the organization
R- risk assessment: managements identification of risk
I- information and communication systems: a means of recording transactions and communicating responsibilities
M- monitoring: assessment of internal controls
E- existing control activities: control policies and procedures

29
Q

The principles that make up internal control components? The C in the CRIME mnemonics.

A 
The tone at the top is how the control environment is often PHRASED
P- philosophy and operating style of management
H- human resources
R- reporting (financial) competences
A- authority and responsibility 
S- structure (organizational)
E- ethical values (and integrity)
D- directors
30
Q

P (philosophy and operating style of management) in the PHRASED mnemonic:
What are the attributes to managements philosophy and operating style.

A
  1. Reliable financial reporting
  2. Objective selection of accounting principals/ rigorous development of estimates
  3. Articulates GAAP compliance
31
Q

H (human resources) in the PHRASED mnemonics

What are the attributes and approaches of the principle?

A

Policies and procedures should be fully compatible with effective financial reporting and internal control.

  1. reward ethical behavior
  2. Fair- not too much pressure on financial performance otherwise justify/ rationalize fraud
32
Q

R in the PHRASED mnemonics: financial reporting competences. What are the attributes and approaches?

A

Qualified personnel

Training and proper supervision

33
Q

A- in the PHRASED mnemonics- authority and responsibilities. What are the attributes and approaches?

A

The authority and responsibility assigned to individuals within the organizational structure should be appropriate to maintain effective internal controls.
Segregation of duties/ authority limited by position/ not to centralized.

34
Q

S- in the PHRASED mnemonic: organizational structure. Attributes and approaches?

A

Responsibility accounting.

Organizational charts, aligning roles to processes, job descriptions, organizational structure, internal audit.

35
Q

E- in the PHRASED mnemonics - integrity and ethical behavior. Approaches and attributes.

A

Adopted by management and demonstrated throughout the organization.

  1. Articulating & demonstrating integrity and ethics
  2. Informing employees about integrity and ethics
  3. Demonstrating commitment to integrity and ethics.
36
Q

D- board of directors in the PHRASED mnemonics: attributes and approaches?

A

Actively involved in their oversight responsibility related to both financial reporting and internal controls.

37
Q

R - risk assessment in the CRIME mnemonics. Attributes and approaches?

A

Principles associated with managements consideration of the risk of material misstatement.

  1. Financial reporting objectives:
    - Appropriately condensed but include all necessary detail
  2. Financial reporting risk:
    - determine what might interrupt the ability to present it’s financial statements in accordance with GAAP
    - managment set triggers to investigate control effectiveness
  3. Fraud risk
38
Q

I (information and communication) in the CRIME mnemonics: information and communication.

A

Identify, capture, process, and distribute information supporting the accomplishment of financial reporting objectives.

  1. Timely, current, and accurate reporting
  2. Designed to capture internal control compliance data and trigger responses.
39
Q

M (monitoring) in the CRIME mnemonics: evaluations and approaches. ** important to know**

A

Provide an assessment of the performance of the system of internal control over time.

  1. Ongoing and separate evaluations and report deficiencies
    - easier to steal cash and inventory vs a building. (PP&E)
  2. approaches and principles:
    - Metrics to track performance
    - relating metrics to financial reporting
    - self assessment
    - computer network testing
    - internal auditing
    - prioritize accounts based on risk.
  3. Reporting deficiencies in internal controls- to appropriate leadership in a timely manner.
40
Q

E (existing control activities) - in the CRIME mnemonics

A

Risk assessment integration
Mitigate risk
Document controls

41
Q

Two parts of enterprise risk management?

A
  1. Strategy- balance risk and return

2. How to invest capital within risk constraints

42
Q

The intent of enterprise risk management is?

A

To allow management to effectively deal with uncertainty, evaluate risk acceptance, and build value. Value is maximized when strategy balances risks and returns as well as efficiency and effectiveness in accomplishing objectives.

43
Q

What are the four enterprise risk management categories?

A

SORC:
S- strategic: high level goals designed to achieve the mission
O- operations: achievement of objectives through the effective and efficient use of resources.
R- reporting: achievement of reliable reporting
C- compliance: ensuring compliance with laws and regulations

44
Q

Components of enterprise risk management (ERM)?- logical order

A 
IS EAR AIM
I- internal environment
S- setting objectives
E- event identification
A- assessment of risk
R- risk response
A- activities (control) 
I- information and communication
M- monitoring
45
Q

What are the components of ERM internal control- the I in the IN EAR AIM mnemonics?

A 
PHRASED C
P- philosophy of risk management
H- human resource standards
R- risk appetite
A- authority and responsibility
S- structure ( organizational)
E- ethical values (and integrity)
D- directors
C- commitment to competence -** required competency levels for each job function**
46
Q

What are the components of ERM - objective settings- the S in the IS EAR AIM mnemonics?

A 
The SORC mnemonics 
S- strategic
O- operational
R- reporting
C- compliance
47
Q

What are the components of ERM: event identification - the E in the IS EAR AIM mnemonics?

A

Identify both negative (risks) and positive (opportunities). Influencing factors include external and internal events. internal like technology choices and personnel.

48
Q

What are the components of ERM: risk assessment - the A in the IS EAR AIM mnemonics?

A

Inherent risk- if management takes no action
Residual risk- if management takes action
Data sources- past experiences with similar events
Probabilistic models- based on historical events / objective
Non-probabilistic models- opinion

49
Q

What are the components of ERM: risk response - the R in the IS EAR AIM mnemonics?

A

Avoidance- avoid or terminate risk
Reduction- reduce or mitigate risk
Sharing- transferring risk
Acceptance- take no action

50
Q

What are the components of ERM: control activities - the A in the IS EAR AIM mnemonics?

A 
Same as the E in the CRIME mnemonics
Should include:
Risk assessment integration
Mitigate risk
Document controls
51
Q

What are the components of ERM: information and communication - the I in the IS EAR AIM mnemonics?

A

The same as the I in the CRIME mnemonics.
Identify, capture, process, and distribute information supporting the accomplishment of financial reporting objectives.
1. Timely, current, and accurate reporting
2. Designed to capture internal control compliance data and trigger responses.

52
Q

What are the components in the ERM: monitoring -M in the IS EAR AIM mnemonics?

A

Provide an assessment of the performance of the system of internal control over time.

  1. Ongoing and separate evaluations and report deficiencies
    - easier to steal cash and inventory vs a building. (PP&E)
  2. approaches and principles:
    - Metrics to track performance
    - relating metrics to financial reporting
    - self assessment
    - computer network testing
    - internal auditing
    - prioritize accounts based on risk.
  3. Reporting deficiencies in internal controls- to appropriate leadership in a timely manner.
53
Q

What is the definition of Change control process to information technology?

A

Consider the manner in which management monitors and authorizes changes to a variety of information technology matters including software application programs, system software, database administration, networks and security, and job scheduling.

54
Q

Independence criteria for the audit committee members are:

A

1- audit committee members may nOt accept compensation from the issuer for consulting or advisory service
2- audit committee members may not be affiliated person of the issuer ( affiliation means a person has the a unity to influence financial decisions)

55
Q

SOX- code of ethics for senior officers consist of 3 standards to adhere by:

A
  1. Honest and ethical conduct
  2. Full, fair, accurate, and timely disclosures in periodic financial reports
  3. Compliance with laws, rules, and regulations

Corporate Governance And Operations Management (3 decks)

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