Chapter 10

conflict of interest

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

enron corporation

fortunes mag named americas most innovative company for six years before it was discovered to have been involved in one of the largest instances of accounting fraud in world history. in 2001 which over 21000 employees it filled the largest bankruptcy in US history and disclosed a scandal that resulted in loss of millions of dollars, thousands of jobs, the downfall of big five accounting firm arthur anderson LLP, at least one suicide, and several trials and convictions, among other consequences. is liquidating assets to this day

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

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

duty of good faith

requires obedience, compelling board members to be faithfull to the organizations mission. in other words they are not permitted to act in a way that is inconsistent with the central goals of the organization

sarbanes oxley act

(public accounting reform and investor protection act of 2002) 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 was enacted very shortly following and directly in response of enron scandals of 2001. one of the greatest areas on consternation and debate has emerged surround SOX involves high cost of compliance and the challenging burden therefore places 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

internal control

a process, effected by an entities board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

fiduciary duties

a professional and ethical obligation-to their clients, duties that override their own personal interests

european union 8th directive

covers some of the same issues as the sarbanes oxley act but applies these requirements and restrictions to companies traded on european union exchanges. the update to the directive in 2005 clarified required duties, independence, and ethics of statutory auditors and called for public oversight of the accounting profession and external quality assurance of both audit and financial reporting processes. in addition the directive strives to improve cooperation between EU oversight bodies outside the EU regulatory infrastructure (ex the US public company accounting oversight board)

control environment

one of the five elements that comprise the control structure similar to the culture of an organization, and support people in the achievement of the organizations objectives. the control environment "sets the tone of an organization influencing the control consciousness of its people"

gatekeeper

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

corporate governance

the structure by which corporations are managed, directed, and controled toward the objectives of fairness, accountability, and transparency. the structure generally will determine the relationship between the board of directors, the share holders or owners of the firm and the firms executives and management

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

Committee of sponsoring organizations (COSO)

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