Chapter 5-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Chapter 5-2 Corporate Governance and the Sarbanes-Oxley Act Accounting Information Systems, 2 nd Edition

Chapter An overview of corporate governance 2. 2.Participants in the corporate governance process 3. 3.The functions within the corporate governance process 4. 4.The history of corporate governance 5. 5.The Sarbanes–Oxley Act of The impact of the Sarbanes–Oxley Act on corporate governance 7. 7.The importance of corporate governance in the study of accounting information systems 8. 8.Ethics and corporate governance Study Objectives

Chapter 5-4 SO 1 An overview of corporate governance An Overview of Corporate Governance Accountants would characterize corporate governance as a system of checks and balances whereby a company’s leadership is held accountable for building: ► shareholder value and ► creating confidence in the financial reporting processes. Tone at the top - set of values and behaviors in place for the corporate leaders.

Chapter 5-5 b. IRS audits. Which of the following is not considered a component of corporate governance? c. Internal audits. d. External audits. a. Board of directors oversight. SO 1 An overview of corporate governance An Overview of Corporate Governance Question

Chapter 5-6 b. Shareholders and regulators. Good corporate governance is achieved when the interests of which of the following groups are balanced? c.Shareholders, the corporation, and the community. d. Regulators and the community. a. Internal auditors and external auditors. SO 1 An overview of corporate governance An Overview of Corporate Governance Question

Chapter 5-7 b. promoting an increase in hostile takeovers. Corporate governance is primarily concerned with c. promoting the legitimacy of corporate charters. a. enhancing the trend toward more women serving on boards of directors.. SO 1 An overview of corporate governance An Overview of Corporate Governance d.emphasizing the relative roles, rights, and accountability of a company’s stakeholders. Question

Chapter 5-8 Stakeholders are all of the different people who have some form of involvement or interest in the business. Exhibit 5-1 Stakeholders as participants in the corporate governance process SO 2 Participants in the corporate governance process Participants in Corporate Governance

Chapter 5-9 Internal Stakeholders Shareholders Board of directors Audit committee Management Employees Internal auditors Exhibit 5-1 Stakeholders as participants in the corporate governance process Participants in Corporate Governance

Chapter 5-10 External Stakeholders Communities Investors Creditors Customers and suppliers External auditors Regulators Participants in Corporate Governance Exhibit 5-1 Stakeholders as participants in the corporate governance process

Chapter 5-11 b. SEC. The governing body responsible for establishing the COSO framework for internal controls evaluations is the c. PCAOB. d. FASB. a.Treadway Commission. Participants in Corporate Governance Question SO 2 Participants in the corporate governance process

Chapter 5-12 Policies and procedures in place to lead the directorship of the company. Features of effective leaders: ► recruiting, ► motivating, ► evaluating, ► problem solving, and ► decision making. Management Oversight SO 3 The functions within the corporate governance process Functions Within Corporate Governance

Chapter 5-13 Accurate and transparent financial reporting requires a process approach. Six-step process for internal controls: ► Define key activities and resources. ► Define objectives of each activity. ► Obtain input from experienced users and advisors on the effective design of controls. ► Formally document the details of controls. ► Test the effectiveness of controls. ► Engage in continuous improvement. Internal Controls and Compliance SO 3 The functions within the corporate governance process Functions Within Corporate Governance

Chapter 5-14 Discipline, respect, and accountability encourage good financial stewardship. Earnings management - manipulating financial information. ► early recognition of revenues ► early shipment of products ► falsification of customers ► falsification of invoices or other records ► allowing customers to take products without taking title to the products Financial Stewardship SO 3 The functions within the corporate governance process Functions Within Corporate Governance

Chapter 5-15 Integrity, fairness, and accountability are the underlying concepts in each of the roles of corporate governance. Ethical Conduct SO 3 The functions within the corporate governance process Functions Within Corporate Governance

Chapter 5-16 b. compliant. When financial information is presented properly and its correctness is verifiable, it is c.accurate. d. accountable. a. transparent. SO 3 The functions within the corporate governance process Functions Within Corporate Governance Question

Chapter 5-17 History of Corporate Governance Corporate governance first came to light in the 1930s with the creation of the Securities and Exchange Commission and in reaction to the accounting problems connected with the market crash of 1929 and the Great Depression. Over the years, the concept has evolved as the business world has shifted focus from materiality to earnings pressures and, most recently, to the requirements of the Sarbanes–Oxley Act. SO 4 The history of corporate governance

Chapter 5-18 The Sarbanes–Oxley Act (“the Act”) applies to public companies and the auditors of public companies. ► The Public Company Accounting Oversight Board (PCAOB) was established. ► PCAOB comprises five members appointed by the SEC. ► PCAOB governs the work of auditors of public companies ► PCAOB has investigative and disciplinary authority over the performance of public accounting firms. SO 5 The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002

Chapter 5-19 Certain sections of the Act pertain to audit services. ► 201—Services outside scope of practice of auditors. ► 301—Public company audit committees. ► 302—Corporate responsibility for financial reports. ► 906—Failure of corporate officers to certify financial reports. ► 401—Disclosures in periodic reports. ► 404—Management assessment of internal controls. ► 406—Code of ethics for senior financial officers. SO 5 The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002

Chapter 5-20 Certain sections of the Act pertain to audit services. ► 409—Real-time disclosures. ► 802—Criminal penalties for altering documents. ► 1102—Tampering with a record or otherwise impeding an official proceeding. ► 806—Protection for employees of publicly traded companies who provide evidence of fraud. SO 5 The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002

Chapter 5-21 b. Programming assistance on the new division’s general ledger system. Which of the following nonaudit services may be performed by auditors for a public-company audit client? c. Human resources consulting regarding personnel for the new division. a. IT consulting regarding the general ledger system for a newly acquired division. d.Income tax return preparation for the new division. SO 5 The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002 Question

Chapter 5-22 b. It specifies that whistleblowers must be terminated so as to avoid retaliation. Section 806 of the Sarbanes–Oxley Act is often referred to as the whistleblower protection provision of the Act because c.It protects whistleblowers’ jobs and prohibits retaliation. a. It offers stock ownership to those who report instances of wrongdoing. d. It provides criminal penalties for the alteration or destruction of documents. SO 5 The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002 Question

Chapter 5-23 ► More knowledgeable about accounting principles and financial systems. ► Management certification of financial information. ► Rigid penalties for noncompliance. SO 6 The impact of the Sarbanes–Oxley Act on corporate governance Impact of Sarbanes-Oxley Act Management Oversight

Chapter 5-24 ►Extra work for accountants, IT departments, and executives. ►More paperwork is now prepared, retained, and filed with the SEC. ►More timely information is required. ►Section 404 requires companies to monitor their systems to find weaknesses in internal controls. SO 6 The impact of the Sarbanes–Oxley Act on corporate governance Impact of Sarbanes-Oxley Act Internal Controls and Compliance

Chapter 5-25 Financial Stewardship Act has caused many companies to take a deeper look at their policies and procedures that govern corporate conduct. SO 6 The impact of the Sarbanes–Oxley Act on corporate governance Ethical Conduct  codes of conduct  performance evaluation models  communications Impact of Sarbanes-Oxley Act

Chapter 5-26 b. Management and employees. In the corporate governance chain of command, the audit committee is accountable to c.Governing bodies such as the SEC and PCAOB. d. The external auditors. a. The company’s vendors and other creditors. SO 6 The impact of the Sarbanes–Oxley Act on corporate governance Impact of Sarbanes-Oxley Act Question

Chapter 5-27 b.The corporate leader must be more in tune with IT to provide corporate governance solutions. Which of the following is true regarding the post-Sarbanes–Oxley role of the corporate leader? c. The corporate leader must be more focused on merger and acquisition targets. a. More emphasis is placed on strategic planning and less emphasis on financial information. d. The corporate leader tends to be less involved with the board of directors. SO 6 The impact of the Sarbanes–Oxley Act on corporate governance Impact of Sarbanes-Oxley Act Question

Chapter 5-28 The Sarbanes–Oxley Act heightens the business value of financial information. Since the Act requires more financial information and faster financial reporting, there is more attention than ever on the importance of the accountants and IT personnel who provide financial information for the company. SO 7 Importance of corporate governance in the study of AIS Corporate Governance in the Study of AIS

Chapter 5-29 Internal stakeholders may sometimes have difficult ethical choices to make when their personal interests conflict with the interests of shareholders. Corporate governance must provide the structure to make sure that a system of financial stewardship is maintained, even when times get tough. SO 8 Ethics and corporate governance Ethics and Corporate Governance

Chapter 5-30 Motorola Solutions, Inc., a worldwide electronics conglomerate, has a longstanding reputation of being a great place to work. In addition to its economic success, it is well known for its model social and environmental performance. The company’s corporate citizenship programs support philanthropy, diversity, wellness, and community outreach. The company prides itself on being a great corporate citizen. Motorola’s favorable reputation of strong ethics was threatened, however, as the company has been forced to downsize several times during the past two decades in order to maintain its competitive edge (like many high-tech companies). In carrying out this difficult task of reducing its workforce, management made sure that affected people were treated with respect, protecting employee benefits for as long as possible during the transition periods. It offered placement counseling and provided extended medical coverage and severance packages. Motorola’s management team, claims that times of hardship prove how important corporate governance is to a corporation SO 8 Ethics and corporate governance Real World

Chapter 5-31 b. A small deceptive act that intensifies into criminal behavior Many corporate frauds involve c. An earnings management motive. a. Managers soliciting assistance from their subordinates. d.All of the above. SO 8 Ethics and corporate governance Ethics and Corporate Governance Question

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