Corporate Governance

Appendix 1A

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2012byTheMcGrawHillCompanies,Inc.Allrightsreserved.
 1A-2

Corporate Governance

The system by
which a company is directed
and controlled.
Board of Incentives and
Directors monitoring for

Top To pursue
Management objectives of

Stockholders
 1A-3

The Sarbanes-Oxley Act of 2002

The
The Sarbanes-Oxley
Sarbanes-Oxley Act Act of
of 2002
2002 was
was intended
intended to to protect
protect the
the
interests
interests of
of those
those who
who invest
invest in
in publicly
publicly traded
traded companies
companies by by
improving
improving the
the reliability
reliability and
and accuracy
accuracy ofof corporate
corporate financial
financial
reports
reports and
and disclosures.
disclosures. SixSix key
key aspects
aspects ofof the
the legislation
legislation include:
include:
The
The Act
Act requires
requires both
both the
the CEO
CEO andand CFO
CFO to
to certify
certify in
in writing
writing
that
that their
their companys
companys financial
financial statements
statements and
and disclosures
disclosures
fairly
fairly represent
represent the
the results
results of
of operations.
operations.
The
The Act
Act establishes
establishes the
the Public
Public Company
Company Accounting
Accounting Oversight
Oversight
Board
Board to
to provide
provide additional
additional oversight
oversight of
of the
the audit
audit profession.
profession.
The
The Act
Act places
places the
the power
power to to hire,
hire, compensate,
compensate, and and terminate
terminate
public
public accounting
accounting firms
firms in
in the
the hands
hands of of the
the audit
audit committee.
committee.
The
The Act
Act places
places restrictions
restrictions onon audit
audit firms,
firms, such
such as
as prohibiting
prohibiting
public
public accounting
accounting firms
firms from
from providing
providing aa variety
variety of
of non-audit
non-audit
services
services to
to an
an audit
audit client.
client.
 1A-4

The Sarbanes-Oxley Act of 2002

(continued)
(continued)
The
The Act
Act requires
requires aa public
public companys
companys independent
independent auditor
auditor
to
to issue
issue an
an opinion
opinion on
on the
the effectiveness
effectiveness ofof the
the companys
companys
internal
internal control
control over
over financial
financial reporting
reporting to
to accompany
accompany
managements
managements assessment,
assessment, and
and both
both are
are included
included in
in the
the
companys
companys annual
annual report.
report.

The
The Act
Act establishes
establishes severe
severe penalties
penalties for
for certain
certain behaviors,
behaviors,
such
such as:
as:
UpUp to
to 20
20 years
years in
in prison
prison for
for altering
altering or
or destroying
destroying any
any
documents
documents that
that may
may eventually
eventually bebe used
used in
in an
an official
official
proceeding.
proceeding.
UpUp to
to 10
10 years
years in
in prison
prison for
for retaliating
retaliating against
against aa
whistle
whistle blower.
blower.
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Internal Control
Internal control is a process designed to
provide reasonable assurance that
objectives are being achieved.

Preventive Controls Detective Controls

Prevents or deters Detects undesirable
undesirable events events
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Internal Control
Type of Internal Controls for Financial Reporting
Type of Control Classification Description

Authorizations Preventive Requiring management to formally approve

certain types of transactions.

Reconciliations Detective Relating data sets to one another to identify and

resolve discrepancies.

Segregation of Preventive Separating responsibilities related to authorizing

Duties transactions, recording transactions, and
maintaining custody of the related assets.
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Internal Control
Type of Internal Controls for Financial Reporting
Type of Control Classification Description

Physical Preventive Using cameras, locks, and physical barriers to

Safeguards protect assets. .

Performance Detective Comparing actual performance to various

Reviews benchmarks to identify unexpected results.

Maintaining Detective Maintaining written and/or electronic evidence to

Records support transactions.

Information Preventive/ Using controls such as passwords and access

Systems Detective logs to ensure appropriate data restrictions.
Security
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Internal Control
Internal
Internal controls
controls cannot
cannot guarantee
guarantee that
that
objectives
objectives are
are achieved
achieved because:
because:
Even
Even well-designed
well-designed internal
internal control
control systems
systems
can
can break
break down.
down.
Two
Two employees
employees may may collude
collude to
to circumvent
circumvent the
the
control
control system.
system.
Senior
Senior leaders
leaders may
may manipulate
manipulate financial
financial
results
results by
by intentionally
intentionally overriding
overriding prescribed
prescribed
policies
policies and
and procedures.
procedures.
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End of Chapter 1A