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

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
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

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 1 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 1 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 1 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 1 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 2 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


Participants
Participants in
in Corporate

Corporate Governance
Governance
Question
The governing body responsible for establishing the COSO
framework for internal controls evaluations is the
a. Treadway Commission.
b. SEC.
c. PCAOB.
d. FASB.

Chapter
5-11

SO 2 Participants in the corporate governance process


Functions
Functions Within
Within Corporate
Corporate Governance
Governance
Management Oversight
Policies and procedures in place to lead the directorship of the
company.
Features of effective leaders:
► recruiting,
► motivating,
► evaluating,
► problem solving, and
► decision making.

Chapter
5-12

SO 3 The functions within the corporate governance process


Functions
Functions Within
Within Corporate
Corporate Governance
Governance
Internal Controls and Compliance
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.
Chapter
5-13

SO 3 The functions within the corporate governance process


Functions
Functions Within

Within Corporate
Corporate Governance
Governance
Financial Stewardship
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
Chapter
5-14

SO 3 The functions within the corporate governance process


Functions
Functions Within
Within Corporate
Corporate Governance
Governance
Ethical Conduct
Integrity, fairness, and accountability are the underlying
concepts in each of the roles of corporate governance.

Chapter

5-15

SO 3 The functions within the corporate governance process


Functions
Functions Within
Within Corporate
Corporate Governance
Governance
Question
When financial information is presented properly and its
correctness is verifiable, it is
a. transparent.
b. compliant.
c. accurate.
d. accountable.

Chapter
5-16

SO 3 The functions within the corporate governance process


History
History of
of Corporate
Corporate Governance
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.

Chapter
5-17

SO 4 The history of corporate governance


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 5 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 5 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 5 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 5 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 5 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 6 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 6 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 6 The impact of the Sarbanes–Oxley Act on corporate governance