Accounting information systems controls and process 2nd tunnwe weickgenannt chapter 05

Chapter 5-2 Corporate Governance and the Sarbanes-Oxley Act Accounting Information Systems, 2 nd Edition... The importance of corporate governance in the study of accounting information

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Prepared by Coby Harmon University of California, Santa Barbara

Westmont College

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Corporate Governance and the Sarbanes-Oxley Act

Accounting Information Systems, 2 nd Edition

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1. An overview of corporate governance

2. Participants in the corporate governance process

3. The functions within the corporate governance process

4. The history of corporate governance

5. The Sarbanes–Oxley Act of 2002

6. The impact of the Sarbanes–Oxley Act on corporate governance

7. The importance of corporate governance in the study of

accounting information systems

8. Ethics and corporate governance

Study Objectives

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An Overview of Corporate 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.

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a Board of directors oversight.

SO 1 An overview of corporate governance

Question

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b Shareholders and regulators.

Good corporate governance is achieved when the interests

of which of the following groups are balanced?

c Shareholders, the corporation, and the community.

d Regulators and the community.

a Internal auditors and external auditors.

Question

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b promoting an increase in hostile takeovers.

Corporate governance is primarily concerned with

c promoting the legitimacy of corporate charters.

a enhancing the trend toward more women serving on

boards of directors

d emphasizing the relative roles, rights, and

accountability of a company’s stakeholders.

Question

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Stakeholders are all of

the different people who

have some form of

governance process

Participants in Corporate Governance

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Exhibit 5-1

Stakeholders as participants in

the corporate governance

process

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Question

SO 2 Participants in the corporate governance process

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SO 3 The functions within the corporate governance process

Functions Within Corporate Governance

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Accurate and transparent financial reporting requires a process approach Six-step process for internal controls:

► Define key activities and resources

► Define objectives of each activity

► Obtain input from experienced users and advisors on the

effective design of controls

► Formally document the details of controls

► Test the effectiveness of controls

► Engage in continuous improvement

Internal Controls and Compliance

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Discipline, respect, and accountability encourage good

financial stewardship.

Earnings management - manipulating financial information

► early recognition of revenues

► early shipment of products

► falsification of customers

► falsification of invoices or other records

► allowing customers to take products without taking title to

the products

Financial Stewardship

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Integrity, fairness, and accountability are the underlying

concepts in each of the roles of corporate governance.

Ethical Conduct

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Question

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History of Corporate Governance

Corporate governance first came to light in the 1930s with

the creation of the Securities and Exchange Commission

and in reaction to the accounting problems connected with

the market crash of 1929 and the Great Depression

Over the years, the concept has evolved as the business

world has shifted focus from materiality to earnings

pressures and, most recently, to the requirements of the

Sarbanes–Oxley Act.

SO 4 The history of corporate governance

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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

SO 5 The Sarbanes-Oxley Act of 2002

Sarbanes-Oxley Act of 2002

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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

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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

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b Programming assistance on the new division’s general ledger

system

Which of the following nonaudit services may be performed by

auditors for a public-company audit client?

c Human resources consulting regarding personnel for the new

division

a IT consulting regarding the general ledger system for a newly

acquired division

d Income tax return preparation for the new division

Question

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b It specifies that whistleblowers must be terminated so as to

avoid retaliation

Section 806 of the Sarbanes–Oxley Act is often referred to as the

whistleblower protection provision of the Act because

c It protects whistleblowers’ jobs and prohibits retaliation

a It offers stock ownership to those who report instances of

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► More knowledgeable about accounting principles and

financial systems.

► Management certification of financial information

► Rigid penalties for noncompliance.

SO 6 The impact of the Sarbanes–Oxley Act on corporate governance

Impact of Sarbanes-Oxley Act

Management Oversight

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► 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

Internal Controls and Compliance

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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

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b Management and employees.

In the corporate governance chain of command, the audit

committee is accountable to

c Governing bodies such as the SEC and PCAOB.

d The external auditors.

a The company’s vendors and other creditors.

Question

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b The corporate leader must be more in tune with IT to provide

corporate governance solutions.

Which of the following is true regarding the post-Sarbanes–Oxley role

of the corporate leader?

c The corporate leader must be more focused on merger and

acquisition targets.

a More emphasis is placed on strategic planning and less

emphasis on financial information.

d The corporate leader tends to be less involved with the board of

directors.

Question

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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.

SO 7 Importance of corporate governance in the study of AIS

Corporate Governance in the Study of AIS

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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.

SO 8 Ethics and corporate governance

Ethics and Corporate Governance

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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

Real World

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b A small deceptive act that intensifies into criminal

behavior

Many corporate frauds involve

c An earnings management motive

a Managers soliciting assistance from their

subordinates.

d All of the above.

Ethics and Corporate Governance

Question

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