Chapter 10

Duty of care

Involves the exercise of reasonable care by a board member to ensure that the corporate executives with whom she or he works carry out their management responsibilities and comply with the law in the best interests of the corporation.

Conflict of interest

A conflict of interest exists where a person holds a position of trust that requires that she or he exercise judgment on behalf of others, but where her or his personal interests and/or obligations conflict with those of others.

Fiduciary Duties

A legal duty to act on behalf of or in the interests of another.

Committee of Sponsoring Organizations

COSO is a voluntary collaboration designed to improve financial reporting through a combination of controls and governance standards called the Internal Control-Integrated Framework. It was established in 1985 by five of the major professional accounting and finance associations originally to study fraudulent financial reporting and later developed standards for publicly held companies. It has become one of the most broadly accepted audit systems for internal controls.

Conflicts of interest in accounting

Eroded trust often exists as a result of varying interests of stakeholders. They may include underreporting income, falsifying documents, allowing or taking questionable deductions, illegally evading income taxes, and engaging in fraud.

Sections of Sarbanes-Oxley Act

Implemented on July 30, 2002, and administered by the Securities and Exchange Commission to regulate financial reporting and auditing of publicly traded companies in the United States. SOX or SarbOx (popular shorthands for the act) was enacted very shortly following and directly in response to the Enron scandals of 2001. One of the greatest areas of consternation and debate that has emerged surrounding SOX involves the high cost of compliance and the challenging burden therefore placed on smaller firms. Some contend that SOX was the most significant change to the corporate landscape to occur in the second half of the 20th century.

Duty of loyalty

Requires faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that conflicts of interest are always to be resolved in favor of the corporation.

Duty of good faith

Requires obedience, compelling board members to be faithful to the organization's mission. In other words, they are not permitted to act in a way that is inconsistent with the central goals of the organization.

Excessive compensation packages

Serve interest in two ways, provide an incentive for executive performance and they serve as rewards for accomplishments.

Gatekeeper

Some professions, such as accountant, that act as "watchdogs" in that their role is to ensure that those who enter into the marketplace are playing by the rules and conforming to the conditions that ensure the market functions as it is supposed to function.

Insider trading

Trading of securities by those who hold private inside information that would materially impact the value of the stock and that allows them to benefit from buying or selling stock.