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Wiley CPAexcel Exam Review 2014 Focus Notes: Business Environment and Concepts by Ray Whittington

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Focus on: Corporate Governance, Internal Control, and Enterprise Risk Management—Module 40

CORPORATE GOVERNANCE AND ENTERPRISE RISK MANAGEMENT

Corporate Governance: Establish Incentives and Monitoring

  • Owners separate from management
  • Agency problem: Will managers act in owners’ interest?

Incentives to Defeat Agency Problem

Forms of Executive Compensation

  • Base salary and profit: Usually based on accounting measures
    • May lead to earnings manipulation or taking excessive risk
  • Stock options: align shareholders’ and managers’ interest in increasing share prices
    • Differences in timing horizons (management short term?)
    • Underwater options provide no incentive
  • Restricted stock: force managers to think long term

Monitoring Devices

  • Boards of directors
    • Independent nominating/corporate governance committee
    • Independent audit committee (AC) under Sarbanes-Oxley (SOX)
      • At least one financial expert
      • External auditors must report directly to AC
      • AC appoints, determines compensation, and oversees external auditor
  • Stock exchange rules
    • Majority independent directors
      • Provide information to investors as to who is independent
    • Have and make available code of conduct
    • Have an independent AC (required by SOX)
    • Have an independent compensation committee (required by Dodd-Frank)
    • Clawback rules that require executives to pay back incentive compensation when there is an accounting restatement (required by Dodd-Frank)
    • Nonbinding shareholder votes on executive compensation and golden parachutes (required by ...

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