AC 612 Midterm

active investors

- active in the trading of company securities and care greatly about individual firm outcomes

external audit

- assess the validity and reliability of publicly reported financial information

information and communication

- create an information system to capture and report on the organization's risk-management process

proxy voting

- gives shareholders the chance to vote their shares on ballot items at the annual meeting (over the phone, in person, by email, or mail)

institutional shareholders

- non-individuals that have big blocks of ownership in the company and can impose governance reforms through proxy voting process o Mutual funds o Pension funds o Endowments o Hedge funds o Other investment groups

expected compensation

- represent the expected value of compensation promised to an executive in a given year

realized compensation

- represents the total value of compensation that an executive takes home as cash in a given year

B. The audit committee must be composed entirely of independent members of the board.

1) The Sarbanes-Oxley Act of 2002 imposes which of the following requirements? A. The audit committee has selected the independent public accounting firm, the committee must not interfere with the firm's conduct of the financial statement audit. B. The audit committee must be composed entirely of independent members of the board. C. The board of directors must be composed entirely of independent shareholders. D. At least one member of the audit committee must be a former partner of the independent public accounting firm.

C. Internal reporting objectives

10) Risk Assessment includes five specific objectives including each of the following except for: A. Cost/benefit objective B. Operations objectives including risk tolerances C. Internal reporting objectives D. Compliance objectives

C. Increased productivity

11) ERM allows management greater capabilities. Which of the following is NOT a capability of ERM? A. Reduced operational surprises and losses B. Better deployment of capital C. Increased productivity D. Improved risk response decisions

B. II only

12) The components of ERM should be present and functioning effectively. What does "present and functioning effectively" mean? I. No material weaknesses exist. II. Risk is within the risk appetite A. I only B. II only C. Both I and II D. Neither I nor II

D. The risk when management has not taken action to reduce the impact or likelihood of an adverse event

13) Inherent risk is A. A potential event that will adversely affect the organization B. Risk response risk C. The risk after management takes action to reduce the impact or likelihood of an adverse event D. The risk when management has not taken action to reduce the impact or likelihood of an adverse event

A. In practice, management has primary responsibility

14) Under COSO's ERM framework, which of the following most accurately describes risk management responsibilities? A. In practice, management has primary responsibility B. Internal Audit has an oversight role C. The board provides assurance about the effectiveness of ERM D. The chief audit executive should serve as chief risk officer

C. Involves the identification of events with negative impacts on organizational objectives D. Includes selection of the best risk response for the organization

15) Enterprise risk management A. Guarantees achievement of organizational objectives B. Requires establishment of risk and control activities by internal auditors C. Involves the identification of events with negative impacts on organizational objectives D. Includes selection of the best risk response for the organization

B. The Board preapproves the audit services

2) A public accounting firm performs both audit and nonaudit services for an issuer. A violation of the Sarbanes-Oxley Act of 2002 occurs if A. The audit committee preapproves the nonaudit services. B. The Board preapproves the audit services C. The audit committee preapproves the audit services D. Both A and C

D. I, II, and III

3) Which of the following person(s) may bring a whistleblower claim under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010? I. An employee of the issuer II. An individual whose claim originates from information obtained while auditing the issuer III. An individual whose claim originates from information obtained while investigating the issuer A. I only B. I and II only C. I and III only D. I, II, and III

C. Clawback provisions

4) Which provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires an issuer to have a policy defining how to recover performance-based executive compensation? A. Whistleblower protection provisions. B. The provisions on aiding and abetting securities law violations C. Clawback provisions D. HIPAA reclamation provisions

B. Act in the best interests of management and majority shareholders

5) Directors and officers owe a fiduciary duty to the corporation to do all the following, except: A. Act in the best interest of the corporation B. Act in the best interests of management and majority shareholders C. Use due diligence in discharging responsibilities D. Be informed about information relevant to the corporation

A. Acted in good faith

6) The business judgement rule protects a director or an officer from personal liability for honest mistakes of judgement if (s)he A. Acted in good faith B. Cleared it with the CEO C. Got a legal opinion from his(her) personal attorney D. Is covered by an umbrella liability policy.

B. Inspecting and investigating accounting firms

7) The PCAOB was established to oversee the audits of public companies. Its activities include: A. Issuing auditing standards that must be followed for ALL audits B. Inspecting and investigating accounting firms C. Providing oversight to the AICPA and FASB D. Notifying the U.S. Attorney General of incidences of fraud

D. A and C

8) The Dodd-Frank Act expanded the scope of the SEC's authority to prosecute those who aid and abet securities law violations. The legal standard involved is those who: A. Knowingly aid and abet B. Unwittingly aid and abet C. Aid and abet as a result of recklessness. D. A and C

D. Required credit ratings agencies to have their methods independently audited

9) Other key provisions of the Dodd-Frank Act include all of the following except: A. Established the Financial Stability Oversight Council B. Established the Bureau of Consumer Financial Protection C. Required credit ratings agencies to be examined by the SEC D. Required credit ratings agencies to have their methods independently audited

False

All public companies must have their independent auditors attest as to management's assessment over internal control over financial reporting.(T/F)

chairmen is the leader of the board, Lead director gets delegated info from the chairman

Difference between Chairman & Lead director =

Insurance

Director and officer ("D&O") insurance insures both indemnification obligations and for situations (securities law violations) that may not be indemnified against

BOD responsibilities

Hire/fire CEO Measure corporate performance Evaluate management contribution to performance Award compensation Oversees legal and reg compliance Oversees audit process - Top priorities = Strategic planning Merger opportunities CEO succession planning

risk response

ID the organizational actions taken to prevent or deal with each risk

lead director

Jorge is Chairman and CEO of Fjord Corporation. Lars is a member of the board of directors of Fjord who among other things consults with management on the agenda for board meetings and chairs meetings where Jorge is not present. The best description of Lars's role is - board secretary - lead director - executive chairman - chief governance officer

NYSE = shareholder centric & rules based OECD = stakeholder centric

Primary difference between NYSE and OECD

indemnification

Protection from company assets from personal liability that might be incurred in course of duties

SOX sec 203

Requires audit firms rotate the lead engagement partner on all public company audits every 5 yrs

SOX sec 206

Requires former auditors to undergo a 1 yr cooling-off period before they can accept an offer to work for a former client

requires that independent auditors "attest to" and report on management's assessment

SOX Sec 404(b)

Certification of adequacy of SEC filings disclosures certifications Annual report (which is signed by CEO and CFO) must include ICFR report Acknowledging responsibility of management for internal control structure and procedures for financial reporting; and Assessing the effectiveness of same as of year end Auditors must also attest to management's assessment Civil penalties

SOX sec 302

Assessment of Internal Control Over Financial Reporting

SOX sec 404(a)

Certification (with criminal penalties) of "full compliance" in SEC reports

SOX sec 906

False

Sarbanes-Oxley sections 302 and 404 are expressly designed to cover two entirely different financial reporting issues.(T/F)

that the audit of internal control over financial reporting cannot be satisfactorily completed and must disclaim an opinion.

Section 404 of Sarbanes-Oxley, if a public company auditor concludes that management has not fulfilled its responsibilities regarding ICFR, the auditor should communicate, in writing, to management and the audit committee - that the audit of internal control over financial reporting cannot be satisfactorily completed and must disclaim an opinion. - that the audit of internal control over financial reporting can be satisfactorily completed but all deficiencies must be corrected within one fiscal year. - the additional amount of time that it will take for the auditors to complete their audit of internal control over financial reporting - that the audit of internal control over financial reporting cannot be satisfactorily completed and must add a footnote to its opinion noting its concerns with management.

business model

Specifies how management expects to create long-term value Lays out a concrete plan that the can be tested and evaluated when approving corporate strategy Board can rely on to fulfill its oversight function Provides basis for measuring management performance and awarding compensation

True

The SEC proxy rules now require a company to discuss the extent that risks arising from a company's compensation policies are reasonably likely to have a "material adverse effect" on the company.

True

The Sarbanes Oxley law requires that a majority of a publicly-traded company's board of directors be independent.

must manage the corporation in the best interests of someone else, particularly the shareholders

The best definition of "fiduciary" to describe the role of a board member is someone who - must create a trusting relationship with management - must avoid conflicts that would prevent the necessary amount of time being spent on director duties - must manage the corporation in the best interests of someone else, particularly the shareholders - must be diligent in preparing for board duties

corporate governance

The collection of control mechanisms that an organization adopts to prevent or dissuade potentially self-interested managers from engaging in activities detrimental to the welfare of shareholders and stakeholders. Checks and balances

allow management to take actions designed to keep themselves in their positions

The directors' duty "not to entrench" described by Colley refers to the duty not to - allow strategy to get stale - make decisions only based on the interests of the largest and longest-standing shareholders - allow management to take actions designed to keep themselves in their positions - allow management to base its actions on long-standing assumptions about the marketplace

True

The rise of conglomerates caused the courts to clarify what the legal responsibilities of a board of directors are when faced with a takeover attempt from a third party.

- The Securities and Exchange Commission has mandated it.

Which of the following is NOT a reason why CEOs of public companies have lost power to boards and shareholders: - Proxy advisory firms have coordinated greater activism by shareholders. - The Securities and Exchange Commission has mandated it. - There has been an increase in stock ownership by institutions. - The end of staggered boards has meant that management is somewhat less secure in their positions.

uncontested election

a director is elected as long as he or she receives at least one vote

majority vote

a director is required to receive a majority of votes to be elected. Even in an uncontested election a director can fail to win a seat.

overlapping board committees

a director sits on more than one committee at the same company

annual bonus

additional payment, usually in cash, for yearly performance if the company exceeds financial and nonfinancial targets. Requires disclosure through Form 8-K upon adoption

Duty of Loyalty

addresses conflicts of interest

SOX sec 302

adopt rules to require the principal executive and financial officers of a public company to certify in their company's annual and quarterly reports that such reports are accurate and complete and that they have established and maintained adequate internal controls for public disclosure.

cumulative voting

allows a shareholder to concentrate votes on a single board candidate

proxy advisory firms

assists investors in voting the company proxy and fulfilling the fiduciary responsibility to vote the shares on behalf of clients. Highly influencial in the voting process

Advisory Role of BOD

board consults with management regarding the strategic and operational direction of the company

verifiability

can the measure be audited or verified independently?

tokenism

companies recruit underqualified directors in an effort to appear more gender-balanced

busy board

companies whose majority of directors sit on multiple boards

interlocked boards

companies whose senior executives sit reciprocally on each other's boards

agency cost

cost to shareholders and stakeholders due to agency problems

SOX 2002

created in response to Enron and Worldcomm scandals requirements to improve corporate controls and reduce conflicts of interest

1934 Act

created the SEC. oversees the proper functioning of primary and secondary financial markets. emphasis on protecting security holder rights and preventing corporate fraud

information gap

creation of new costs to decision making because specialized information might not easily transfer from the CEO to the chairman

transparency

degree to which the company provides details that supplement and explain accounts, items, and events reported in its FS and other public filings

risk assessment

determine the likelihood and severity of each risk

staggered board

directors are elected to 3 yr terms with 1/3 of the board standing for reelection every 3 yrs

group think

directors reach consensus too quickly because of the way social similarities shape their perception and decision making,

conventionally independent directors

directors who are independent according to NYSE standards

socially independent directors

directors who are independent in their social relation to the CEO

busy directors

directors who hold multiple board seats (usually 3 or more)

dual class shares

each class has equal economic interest but unequal voting rights

SOX sec 304

enables companies to reclaim bonuses from the CEO and CFO if it is later determined that the bonuses were awarded on the basis of manipulated earnings

1933 Act

enhanced disclosure of stock offerings. regulates the offer and sale of securities

right of codetermination

ensures that employees participate in decisions that impact workplace matters

Restricted stock

equity (or cash) awards granted only after specified financial and nonfinancial targets are met during a 3-5 year time period

Internal environment

establish company philosophy toward risk management and risk culture

control activities

establish polices and procedures to ensure that risk response are carried out as planned

Hampel Report

established to review the effectiveness of the Cadbury and Greenbury reports. - Consolidated the two reports into the Combined Code of Best Practices

Objective setting

evaluate company strategy and set organizational goals bas don't eh risk tolerance of management and the board

event identification

examine the risks associated with each potential business opportunity

outside (non executive) directors

expected to execute their duties without undue influence from management because they have no reporting lines to the CEO and do not rely on the company for their livelihood.

annual salary

fixed cash payment made evenly during the course of the yr. Typically set at the beginning of the year

Proxy Access

grant qualifying investor groups the right to nominate directors on the company's proxy o Typically, shareholders who hold 3% or more of company shares and who have held their positions continuously for at least 3 yrs would be eligible to. Nominate up to 25% of the board.

independence

having no material relationship with the listed company (either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company)

dimension

how are the results expressed? Would the results lend itself to different interpretation if expressed in a different manner?

8 times

how many times does the BOD meet per year?

precision

how much measurement error is embedded? What is the potential for intentional manipulation?

compliance risk

how much the company complies with laws and regs that otherwise would damage the firm

repetitional risk

how much the company protects the value of its intangible assets

financial risk

how much the company relies on external financing to support its ongoing operations

sensitivity

how sensitive is the metric to corporate performance and management action?

objectivity

is the measure objective or subjective? Do the different categories of measurement have similar sensitivity, precision, and verifiability?

casual business model

links specific financial and nonfinancial measures in a logical chain to delineate how the corporate strategy translates into the accomplishment of stated goals

Executive Sessions

meeting at least once a year with only independent directors

KPIs

metrics that validly reflect current and future corporate performance Also used to measure management performance and award compensation Must be closely tied to the business model

financial expert

must have experience as a public accountant, auditor principal financial officer, comptroller, or principal accounting officer at an issuer. Must understand accounting principles, preparation of FS, internal controls, and audit committee functions.

fundamental concepts of ERM

o A process, ongoing and flowing through an entity o Affected by people at every level o Applied in strategy setting o Applied across the enterprise, at every level and unit o Designed to ID potential events that will potentially affect the entity and to manage risk within its appetite. o Provide reasonable assurance o Geare to achievement of objectives in one or more separate but overlapping categories

Perquisites

other amenities purchased or provided by the company

benefits

other benefits provided with employment

contractual agreements

other cash or stock payment stipulated in the employment agreement

principles based

outline general accounting concepts but do not always dictate the specific application of these concepts to business activities

Rules based

prescribe detailed rules for how accounting standards should be applied to various business activities

chairman

presides over board meetings.

lead director

presides over executive sessions. Represents the independent directors in conversation with management, shareholders, and other stakeholders.

SOX sec 201

prohibits auditors from performing certain nonaudit services for their audit clients (bookeeeping, financial IS design, etc.)

Director Liability Indemnification Protection

protection from company assets from personal liability that might be incurred in course of duties

SOX sec 806

protects employees from threats and harassments due to reporting

Cadbury Report

provides a benchmark set of recommendations on governance

Turnbull Report

provides recommendation on ways to improve corporate internal controls

business judgement rule

provides that the judgement of a board will not be overridden by a court unless a plaintiff can show that the board failed to inform itself regarding the decision at issue or the board was infected with a conflict of interest Must follow reasonable process Must act in good faith Most protective of outside directors Has to do with duty of care

operational risk

reflects how exposed the company is to disruptions in its operations

risk

represents the likelihood and severity of loss from unexpected or uncontrollable outcomes

Earned compensation

represents the total value of compensation that an executive "earns the right" to keep as cash is delivered and vesting restrictions are removed.

1934 Act

require that financial statements filed as part of SEC filings, such as Form 10-K and Form 10-Q, be reviewed by independent public auditors in accordance with professional standards, before filing with SEC

executive sessions

required by the NYSE, nonexecutive directors meet outside the presences of management in regularly scheduled sessions

Duty of Care

requires a director to make decisions with due deliberation

SOX sec 301`

requires audit committee to create policies for employees to voice opinions and how to resolve complaints

SOX Sec 407(b)

requires companies to appoint a financial expert to the audit committee

Duty of Candor

requires management and the board inform shareholders of all information that is important to their evaluation of the company its management

monitoring

review data from the information system and take actions, as appropriate

Greenbury Report

reviews the executive compensation process

Dodd-Frank Act

say on pay - shareholders get to vote on compensation Expanded disclosure requirements

Agency problems

self-interested executives have the opportunity to take actions that benefits themselves.

activist investors

shareholder who uses an ownership position to actively pursue governance changes at a corporation o May have a more personally driven agenda

Fiduciary Duties

stem from obligation to disclose material information to the public. directors should act in the interests of someone else

risk tolerance

the amount of risk the firm is willing to accept

Oversight role of BOD

the board is expected to monitor management and ensure that it is acting diligently in the interest of shareholders

accounting quality

the degree to which accounting figures precisely reflect the company's change in financial position, earnings, and cash flow during a reporting period

plurality

the directors who receive the most cotes win, regardless of majority

risk management

the process by which a company evaluates and reduces its risk exposure addresses the bigger picture involving outcomes or events that can reduce a company's profitability, lead to severe underperformance, or otherwise threaten an organization's success or viability

board evaluation

the process by which the entire board, its committees, or individual directors are evaluated for their effectiveness in carrying out their stated responsibilities.

internal controls

the processes and procedures that a company puts in place to ensure that account balances are accurately recorded, FS reliably produces, and assets adequately protected form loss or theft. "cash register" (SOX sec 404) o Management is responsible for the adequacy

stock option

the right to buy shares in the future at a fixed exercise price

stakeholder centric

viewpoint that the organization has a societal obligation beyod increasing shareholder value

shareholder centric

viewpoint that the primary obligation of the organization is to maximize shareholder value

cost

what is the cost to develop and track metric? Does its benefit outweigh the cost?

interpretation

what specific attribute does the data measure?