Corporate Governance and Internal Control - Corporate Rights, Responsibilities and Authority

Question 1

What are the Requirements of SOX Section 302

Answer 1

CEO and CFO must certify

1) reviewed annual and quarterly reports
2) no misrepresentation of truths and half truths
3) financial information fairly represented
4) responsibility of establishing and maintaining internal controls
5) recently evaluated internal controls
6) reported the evaluations and conclusion in the financial report
7) relevant procedures in place to ensure important information is delivered to them
8) they are in touch with the audit committee and discussion with internal controls, deficiencies etc have been communicated with the audit committee
9) no significant changes to the internal controls post evaluation

Question 2

What makes efficient and effective corporate Governance important ? How does corporate la set up the 3 layered pyramid?

Answer 2

Since ownership and management of a corporation are separate, and management acts as the agency of the owners, it creates a conflict of interest and hence, corporate governance becomes important.

A) Shareholders are at the bottom of the pyramid where they have a major say in structural issues like form of organization, mergers. acquisitions etc. They elect the directors.

B) Directors form the second layer pyramid, elect the top tier officers, compensate, manage the daily operations of the company.

C) Officers perform their duties through employees of the company performing their duties under the guidance of their supervisors.

Question 3

What is the recent development of the Corporate Governance world?

Answer 3

Sox - Sarbanes - Oxley Act

Treadwell commission of the 1980 which led to the COSo - Committee of Sponsoring Organzations

Question 4

What are the SOX provisions that directly affect the accuracy of financial reporting practices?

Answer 4

1) Audit committee - Independent, hire, compensate, oversee and fire auditors, provisions for whistle blowers to come through
2) SOX section 302 - Certification of officers - Refer flashcard 1
3) Management prohibition - Prohibits Management from manipulation, coercion, misleading fraudulently influence upon auditors

Question 5

What are the SOX provisions that affect Financial Reporting Practices?

Answer 5

1) Reporting of off-B/S-items, use of special purpose vehicles; Reporting of proforma
2) Section 404 - complements section 302 - must include “internal control report” in filings - responsible for establishment and maintenance of Internal control procedures and also an assessment of effectiveness of the internal control
3) Sox requires that annual reports include if code of ethics have been adopted for the executive class and if not why
4) The Board of Directors have a financial expert who
i) has experience preparing auditing FS and related reports
ii) has experience dealing with audit committees
iii) has experience of internal auditing controls
iv) Has understanding of GAAP and FS

Question 6

What are the Whistle Blowing provisions of SOX

Answer 6

1) Establish rules and procedures for enabling whistleblowers to report
2) Prohibits retaliation - can report upto 180 days to OSHA -Occupational SAfety and Health Administration of the Dept of Labor. OSHA decisions can be appealed to the Administrative Law Judges. Further it can be taken to Administrative Review Board. If OSHA has not made a final decision within 180 days of the initial filing, the whistleblower can remove the case to federal district court.
3) Retaliation punishment fine and /or jail upto 10 years

Question 7

What are the provisions of Dodd Frank Act ?

Answer 7

Section 922 and 929 A provide the following-

1) extension of time to report to OSHA to 180 days
2) They can skip the OSHA and directly file at the federal courts
3) Whistleblowers’ right to a jury trial
4) Prohibit agreements that violate right to whistle blow
5) Applies to private subsidiaries of public companies owning more than 51% and consolidated in the FS.
6) They must file within 3 years of knowing that they can sue and within six years of violation
7) Whistle blowers can claim 2x backpay with interest and attorney fees
8) SEC can also sue against retaliation

Sec 922 :-

1) 1 million + imposition : - 10-30% of bounty IF -
i) Original information, WB encouraged to approach within company unless fear of retaliation etc.
ii) Auditors are not entitled to bounty unless :- no action taken after 120 days of reporting to audit committee, iii) company action could impede investigations,
iv) to prevent actions that could result in losses,