Prepared by Coby Harmon University of California, Santa Barbara Westmont College Chapter 5-1 Corporate Governance and the Sarbanes-Oxley Act Chapter 5-2 Accounting Information Systems, 2nd Edition Study Study Objectives Objectives An overview of corporate governance Participants in the corporate governance process The functions within the corporate governance process The history of corporate governance The Sarbanes–Oxley Act of 2002 The impact of the Sarbanes–Oxley Act on corporate governance The importance of corporate governance in the study of accounting information systems Ethics and corporate governance Chapter 5-3 An An Overview Overview of of Corporate Corporate Governance 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 5-4 SO An overview of corporate governance An An Overview Overview of of Corporate Corporate Governance Governance Question Which of the following is not considered a component of corporate governance? a Board of directors oversight b IRS audits c Internal audits d External audits Chapter 5-5 SO An overview of corporate governance An An Overview Overview of of Corporate Corporate Governance Governance Question Good corporate governance is achieved when the interests of which of the following groups are balanced? a Internal auditors and external auditors b Shareholders and regulators c Shareholders, the corporation, and the community d Regulators and the community Chapter 5-6 SO An overview of corporate governance An An Overview Overview of of Corporate Corporate Governance Governance Question Corporate governance is primarily concerned with a enhancing the trend toward more women serving on boards of directors b promoting an increase in hostile takeovers c promoting the legitimacy of corporate charters d emphasizing the relative roles, rights, and accountability of a company’s stakeholders Chapter 5-7 SO An overview of corporate governance Participants Participants in in Corporate Corporate Governance Governance Exhibit 5-1 Stakeholders as participants in the corporate governance process Stakeholders are all of the different people who have some form of involvement or interest in the business Chapter 5-8 SO Participants in the corporate governance process Participants Participants in in Corporate Corporate Governance Governance Exhibit 5-1 Stakeholders as participants in the corporate governance process Internal Stakeholders  Shareholders  Board of directors  Audit committee  Management  Employees  Internal auditors Chapter 5-9 Participants Participants in in Corporate Corporate Governance Governance Exhibit 5-1 Stakeholders as participants in the corporate governance process External Stakeholders  Communities  Investors  Creditors  Customers and suppliers  External auditors  Regulators Chapter 5-10 Sarbanes-Oxley Sarbanes-Oxley Act Act of of 2002 2002 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 Chapter 5-18 SO The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Sarbanes-Oxley Act Act of of 2002 2002 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 Chapter 5-19 SO The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Sarbanes-Oxley Act Act of of 2002 2002 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 Chapter 5-20 SO The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Sarbanes-Oxley Act Act of of 2002 2002 Question Which of the following nonaudit services may be performed by auditors for a public-company audit client? a IT consulting regarding the general ledger system for a newly acquired division b Programming assistance on the new division’s general ledger system c Human resources consulting regarding personnel for the new division d Income tax return preparation for the new division Chapter 5-21 SO The Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Sarbanes-Oxley Act Act of of 2002 2002 Question Section 806 of the Sarbanes–Oxley Act is often referred to as the whistleblower protection provision of the Act because a It offers stock ownership to those who report instances of wrongdoing b It specifies that whistleblowers must be terminated so as to avoid retaliation c It protects whistleblowers’ jobs and prohibits retaliation d It provides criminal penalties for the alteration or destruction of documents Chapter 5-22 SO The Sarbanes-Oxley Act of 2002 Impact Impact of of Sarbanes-Oxley Sarbanes-Oxley Act Act Management Oversight ► More knowledgeable about accounting principles and financial systems ► Management certification of financial information ► Rigid penalties for noncompliance Chapter 5-23 SO The impact of the Sarbanes–Oxley Act on corporate governance Impact Impact of of Sarbanes-Oxley Sarbanes-Oxley Act Act Internal Controls and Compliance ► 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 Chapter 5-24 SO The impact of the Sarbanes–Oxley Act on corporate governance Impact Impact of of Sarbanes-Oxley Sarbanes-Oxley Act Act Financial Stewardship Act has caused many companies to take a deeper look at their policies and procedures that govern corporate conduct Ethical Conduct  codes of conduct  performance evaluation models  communications Chapter 5-25 SO The impact of the Sarbanes–Oxley Act on corporate governance Impact Impact of of Sarbanes-Oxley Sarbanes-Oxley Act Act Question In the corporate governance chain of command, the audit committee is accountable to a The company’s vendors and other creditors b Management and employees c Governing bodies such as the SEC and PCAOB d The external auditors Chapter 5-26 SO The impact of the Sarbanes–Oxley Act on corporate governance Impact Impact of of Sarbanes-Oxley Sarbanes-Oxley Act Act Question Which of the following is true regarding the post-Sarbanes–Oxley role of the corporate leader? Chapter 5-27 a More emphasis is placed on strategic planning and less emphasis on financial information b The corporate leader must be more in tune with IT to provide corporate governance solutions c The corporate leader must be more focused on merger and acquisition targets d The corporate leader tends to be less involved with the board of directors SO The impact of the Sarbanes–Oxley Act on corporate governance Corporate Corporate Governance Governance in in the the Study Study of of AIS AIS 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 Chapter 5-28 SO Importance of corporate governance in the study of AIS Ethics Ethics and and Corporate Corporate Governance Governance 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 Chapter 5-29 SO Ethics and corporate governance Real Real World World 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 Chapter 5-30 SO Ethics and corporate governance Ethics Ethics and and Corporate Corporate Governance Governance Question Many corporate frauds involve a Managers soliciting assistance from their subordinates b A small deceptive act that intensifies into criminal behavior c An earnings management motive d All of the above Chapter 5-31 SO Ethics and corporate governance Copyright Copyright Copyright © 2013 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 5-32 ...Corporate Governance and the Sarbanes-Oxley Act Chapter 5-2 Accounting Information Systems, 2nd Edition Study Study Objectives Objectives An overview of... governance The importance of corporate governance in the study of accounting information systems Ethics and corporate governance Chapter 5-3 An An Overview Overview of of Corporate Corporate Governance... balanced? a Internal auditors and external auditors b Shareholders and regulators c Shareholders, the corporation, and the community d Regulators and the community Chapter 5-6 SO An overview of