Business 1 - Corporate Governance (Cpa Review 2013)

Front 1

Rights, Duties, Responsibilities, and Authority of the Board of Directors

Back 1

Among the specific duties of directors are the election, removal, and supervision of officers (directors generally review the conduct of officers and may remove an officer with or without cause); adoption, amendment, and repeal of bylaws.

Hint 1

The board of directors have - No authority to act "individually". they can act only as a group, there needs to be a quorum

Front 2

Amendment

Back 2

поправка, изменение, дополнение, исправление, внесение поправки или поправок

Front 3

Declaration of distributions by board of directors

Back 3

The board of directors has sole discretion to declare distributions to shareholders, including dividends, in the form of cash, property, or the corporation's own shares. The shareholders have no power to compel a distribution.

Front 4

compel

Back 4

вынуждать, заставлять, принуждать, подчинять

Front 5

Fiduciary duties of the Board of directors

Back 5

Directors are fiduciaries of the corporation and must act In The Best Interest of the Corporation. However, directors are not insurers of the corporation's success. A director will not be liable to the corporation for the acts performed or decisions made in good faith, in a manner the director believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. (called - the business judgment rule)

Hint 5

Thus directors will be liable to the corp only for negligent acts or ommisions.

Front 6

Right to rely (the board of directors)

Back 6

A director is entitled to rely on information, opinions, reports, or statements (incl. financ. statements) if prepared by Corporate officers, employees, or a committee of the board whom the director believes to be liable and competent Or by Legal councel, accountants, other person with professional competence.

Front 7

Liability for unlawful distribution (dividends) - board of directors

Back 7

Directors may be held liable for authorising a distribution in violation of law: 1) Corporation is not able to pay the dividends (due to reg bus issues) 2) If corporations total assets would be less than total liabiliteis

Front 8

Duty of loyalty (the board of directors)

Back 8

Directors owe their corporation a duty of loyalty and must act in the best interest of their corporation. Duty of L. prohibits directors from competing with the corporation. Prohibits from serving a board of a competing entity.

Hint 8

Does not prohibit from transacting business activities.

Front 9

Director's compensation

Back 9

The board of directors has the power to set director compensation

Front 10

Director's conflict of interest

Back 10

An action in which a director has a conflict of interest (with their duty of loyalty) may be upheld only after 1) full disclosure and approval by the disinterested majority of the board of directors or the shareholders 2) If transaction is fair and reasonable to the corporation

Front 11

Corporate opportunity doctrine

Back 11

If a director is presented with a business opportunity that is of interest to his corp, he must present it to the corporation and only if the corporation decides not to take it, he can take it for himself.

Front 12

Indemnification (the board of directors)

Back 12

Corporations are allowed to indemnify directors for expenses for any lawsuit brought against them in their corporate capacity. Corp may also pay any judgement imposed in a lawsuit on the director, Except the shareholder derivative suit.

Front 13

Indemnification

Back 13

Компеснация, возмещение, возмещение ущерба

Front 14

Shareholder derivative suit

Back 14

A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director.

Hint 14

Derivative suits permit a shareholder to bring an action in the name of the corporation against parties allegedly causing harm to the corporation. If the directors, officers, or employees of the corporation are not willing to file an action, a shareholder may first petition them to proceed. If such petition fails, the shareholder may take it upon himself to bring an action on behalf of the corporation. Any proceeds of a successful action are awarded to the corporation and not to the individual shareholders that initiate the action.

Front 15

Limitation on Director Liability

Back 15

The articles of incorporation may eliminate or limit a director's liability to the corporation for money damages for action taken as a director except to the extent of: 1) financial benefit received to which the director was not entitled 2) intentional harm inflicted on the corporation or the shareh-s 3) unlawful distribution 4) Intentional violations of criminal law 5) Breaches of the duty of loyalty

Front 16

Officers

Back 16

Officers are individual agents of the corporation who ordinarily conduct its day-to-day operations and may bind the corporation to contracts made on it's behalf.

Front 17

Officer selection and removal

Back 17

Officers are selected and MAY be removed by the directors with or without cause. An officer may be removed even if the officer has a contract and the of the contract has not expired. (But the corp may be liable for damages in such case).

Front 18

Officer's Authority

Back 18

Officers are corporate agents and agency rules determine their authority and power. A corporate president will generally have apparent authority to enter into contracts and act on behalf of the corporation in the ordinary course of business.

Hint 18

Actual authority = oral/ written instructions. Apparent authority = title CEO/CFO

Front 19

Authority

Back 19

Власть, полномочие, авторитет, влияние

Front 20

Fiduciary Duties and Indemnification of corporate officers

Back 20

Corporate officers, like corporate directors, are subject to fiduciary duties and must discharge their duties in good faith and with the same care as an ordinary prudent person in a like position.
Like directors, officers may be indemnified for expenses for litigation.

Front 21

Officers may also serve as directors

Back 21

Officers should serve as directors of the corporation. Good corporate governance - majority of board should be independent.

Front 22

Officer - Shareholder

Back 22

Officer is not required to be a shareholder, but may be.

Front 23

Sarbanes-Oxley Act of 2002

Back 23

The Sarbanes-Oxley Act of 2002 has had a profound impact on the financial reporting requirements of public companies. In particular, there are numerous provisions for expanded disclosures by corporations AND specific representations required by officers of public companies that must accompany published financial statements.

Front 24

Title 3 - Corporate Responsibility (Sarbanes-Oxley act)

Back 24

Relates to the establishment of an audit committee and the representations made by key corporate officers, typically CEO and CFO

Front 25

Public Company audit Committees

Back 25

Public companies are responsible for establishing an audit committee that is directly responsible for the appointment compensation, and oversight of the work of the public accounting firm. 1) the auditor reports directly to the audit committee 2) The committee is responsible for resolving disputes between the auditor and management

Front 26

Audit committee members independence Criteria

Back 26

They may be board members but must be independent. 1) they may not accept compensation from the issuer for consulting or advisory services 2) Should not be an affiliated person of the issuer (affiliation - person having an ability to influence financial decisions)

Front 27

Audit committees must establish procedures to accept reports of complaints regarding audit, accounting, or internal control issues.

Back 27

1) procedures must accommodate confidential, anonymous reports by employees of the issuer
2) Procedures must accommodate receipt and retention of complaints as well as a method to address those complaints

Front 28

Corporate responsibility for financial reports

Back 28

Key officers (CEO, CFO) must sign certain representations regarding annual and quarterly reports including their assertion that:
1) They have reviewed the report 2) The report does not contain untrue statements or omit material information
3) The financial statements fairly present

Hint 28

4) CFO and CEO signing the report have assumed responsibility for internal controls: - Internal controls have been established in a way that material information has been made available - have been evaluated for effectiveness within 90 days prior to the report - report includes their conclusion as to the effectiveness of internal control

Front 29

CEO and CFO signing the report assert that they have made the following disclosures to the issuer's auditors and the audit committee:

Back 29

1) All significant deficiencies in the design or operation of internal controls which affect the financial statements
2) Any fraud that involves management or any other employee with a significant role in in internal controls

Front 30

Improper influence on the Conduct of audit

Back 30

No officer or director, or any person acting under the direction thereof, may take any action that would fraudulently influence, coerce, mislead, or manipulate the auditor in a manner that would make the financial statements materially misleading.

Front 31

Forfeiture of certain bonuses and profits by CEO/CFO

Back 31

CEO and CFO may be required to reimburse the issuer for: 1) bonuses or incentive-based or equity based compensation (bonuses) 2) Gains on sale of securities during that 12-month period||| If the issuer is required to prepare an accounting restatement due to material noncompliance with any fir rep requirements.

Front 32

Enhanced Financial Disclosures

Back 32

include additional details regarding the financial statements, internal controls, and the operations of the audit committee.

Front 33

Disclosures in periodic reports include

Back 33

1) all material correcting adjustments identified by auditor

2) Material off-balance sheet transactions (operating lease, contingent obligations - lawsuites, relationships with unconsolidated subsidiaries)

3) Conformance of - no untrue statement, no omitted material information, reconciled with GAAP basis fin statements.

4) Use of special purpose entities

Front 34

Conflict of interest provisions

Back 34

Issuers are generally prohibited from making personal loans to directors or executives/ Exeptions apply when consumer loans is part of ordinary business or/and when the same terms are offered the public

Front 35

Disclosures of transactions invoilving management and principal stockholder

Back 35

1) disclosure is required for those who have more than 10% of any class equity security

2) Disclosures are made by filing a statement

3) Statements are filed when 1. At time of registration 2. when person achieves 10% ownership 3. If there has been a change in ownership

Front 36

Management Assesment of internal Controls. Each annual report is required to contain a report that includes the following:

Back 36

1) Statement that management is responsible for establishing and maintaining internal control structure and procedures for financial reporting

2) An assesment as of the end of most recent year of the effectiveness of the internal control structure and procedure for financial reporting.

3) the auditor must attest to management's assessment of internal control

Front 37

Exemptions for enhanced financial disclosures

Back 37

Investment companies are exempted from enhanced financial disclosures

Front 38

Code of Ethics for senior officers (disclosure)

Back 38

1) Disclosure about the code of ethics adopted for senior officers. If was not adopted, must disclose WHY.

2) The code of ethics contemlates standards that promote: 1. Honest and ethical conduct (including conflict of interest) 2. full, fair, accurate and timely disclosures in periodic financial reports. 3. Compliance with laws, rules and regulations

Front 39

Disclosures of Audit Committee "Financial Expert"

Back 39

1) At least one member of the audit committee should be a financial expert. Disclosures must include the existance of financial expert in the aud. commitee or the reason WHY there is no such expert there.

Hint 39

2) Expert's knowldge muts include 1. Understanding of GAAP 2. Experience in audit or preparation of fin statements for comparable issuers 3. Application of GAAP 4. Experience with internal controls 5. Understading of audit committee functions

Front 40

Enhanced Review of Periodic Disclosures by Issuers

Back 40

SEC should review disclosures made by issuers, including those in form 10K. The following must be considered when scheduling review: 1)issuers that have issued material restatement of fin results; those who has high volatility in stock prices; those with the largest market capitalization; Emerging companies with disparities in price-to earnings ratios; those who significantly affect any material sector of economy

Front 41

Criminal Penalties for altering documents

Back 41

1) Individuals who alter, destroy, mutilate, conceal, cover up, falsify, or make false entry in any record, document, or tangible object with the intent to influence an investigation, will be fined, imprisoned for not more than 20 years or both.

Hint 41

2) Auditors of issuers should retain all audit and review work papers for a period of 7 years from the end of the fiscal period in which the audit or review was conducted. Failure to do so will result in a fine, imprisonment for not more than 10 years or both.

Front 42

Statute of limitations for Securities Fraud

Back 42

No later than the earlier of two years after the discovery of the facts constituting the violation or five years after the violation

Front 43

Whistle-blower protection

Back 43

An employee who lawfully provides evidence of fraud may not be discharged, demoted, suspended, threatened, harassed or other. If discharge occurred, employee may file a complaint with the Secretary of Labor and may be provided: Reinstatement with the same seniority status; back pay with interest; Compaensation for any special damages as a result of the discrimination.

Front 44

Criminal Penalties for Securities Fraud

Back 44

An individual who knowlingly executes, or attempts to execute, securities fraud will be dined, imprisoned for not more than 20 years or both.

Front 45

Internal Control -

Back 45

Integrated Framework to assist organizations in developing comprehensive assessments of internal control effectiveness.

Front 46

COSO. The Committee on Sponsoring Organizations

Back 46

Study factors that lead to fraudelent financial reporting

Hint 46

COSO's Framework is widely regarded as an appropriate and comprehensive basis to document the assessment of internal controls over financial reporting.

Front 47

COSO - Treadway Commission

Back 47

The COSO is sometimes referred to as the Treadway Commission. It is not a governmental body nor is sponsored by the Congress.