Professional Documents
Culture Documents
Corporate Governance Refers in General To The Rules, Procedures, or Laws Whereby
Corporate Governance Refers in General To The Rules, Procedures, or Laws Whereby
In the past few decades, corporate governance has come under the spotlight because
of high-profile scandals that involve misuse of corporate power and even alleged
unlawful activity by company officers. An essential element of an effective corporate
governance leadership includes arrangements for civil or criminal prosecution of people
who behave in unethical or participate in illegal acts in the name of the company.
A clear and applied corporate governance presents a structure that works for the
advantage of all involved by ensuring that the company complies with accepted ethical
standards, best practices, and formal laws. Thus, companies have been established at
the regional, national, and global levels.
There are a number of business professions that enforce rules and attests to the
fundamental fairness of the system. These professions may be called gatekeepers and
some examples are: accountants, financial analysts, attorneys, and auditors. They are
intermediaries and they act between different parties in the market and are bound to
ethical duties in their professions. All participants in the market – investors, boards,
management, and bankers – depend on these gatekeepers. When the independence
and integrity of gatekeepers become compromised, the market confidence suffers.
The guidelines and enforcement tactics outlined by the Sarbanes-Oxley Act improve or
add to current legislation dealing with security regulations. The following provisions
have the biggest influence on corporate governance and boards:
● Section 201: Services outside the scope of auditors (prohibits various
forms of professional services that are determined to be consulting rather
than auditing).
● Section 301: Public company audit committees (requires independence),
mandating majority of independents on any board (and all on audit
committee) and total absence of current or prior business relationships.
● Section 307: Rules of professional responsibility for attorneys (requires
lawyers to report concerns of wrongdoing if not addressed).
● Section 404: Management assessment of internal controls (requires that
management fi le an internal control report with its annual report each year
in order to delineate how management has established and maintained
effective internal controls over financial reporting).
● Section 406: Codes of ethics for senior financial officers (required).
Chapter 8: Ethical Decision-Making: Corporate Governance, Accounting, & Finance
● Section 407: Disclosure of audit committee financial expert (requires that
they actually have an expert).
A company executes internal controls regularly. For instance, an employee inputs his
password to log in to the system; an employee submits a day-off request to the
supervisor for approval; and an Accounting Manager reviews bank account
reconciliations.
Out of the five components, control environment provides the foundational basis for
carrying out internal controls in a company because control environment sets the tone
of a company and it is the foundation for all other components of internal control,
providing discipline and structure.
The board of directors and management set up the control environment through
policies, procedures, processes, standards and structures giving the basis for carrying
out internal controls in a company.
Chapter 8: Ethical Decision-Making: Corporate Governance, Accounting, & Finance
There may be executives who question the board’s legal right to inquire about the ethics
of its executives and others. If a board is knowledgeable of a usual procedure that it
considers to be unethical but that is entirely within the domain of the law, on what
grounds can the board mandate the executive to halt the procedure? The board can
impede actions to protect the lasting sustainability of the company. Despite the type of
the unethical behavior, stakeholders like consumers or personnel can be negatively
affected by unethical acts which can negatively affect the company which could lead to
the downfall of the company in the future. It is a fact that it is the board’s fiduciary duty
to protect the company by inhibiting unethical acts. If corporate executives violate
universal principles of decency and respect for human dignity, people will demand a
penalty. Subsequently, a board has a duty to hold its executives to this higher standard
of ethics instead of merely obeying the legal rules.
It has been suggested that board members be given additional responsibilities beyond
the law to survey and to investigate the companies that they represent. It is said that an
honest conversation is the best manner for understanding what the board members
know and do not know. Board members must know how the company makes profits and
whether consumers and clients really do pay for products and services. The financial
flow of the company says a lot about what moves the company. Board members must
also be demanding in their inquiries about corporate vulnerabilities. They must discover
what factors could cause the company to fall and what competitors might do to aid it.
Making certain the data regarding vulnerabilities is regularly and consistently sent to the
executives and the board forges effective prevention. The board needs to fully
comprehend the direction the company is headed and whether it is realistic to get there.
This will be less likely if the company is not living within its means or if it is squandering
much of its growth profits to its executives in compensation.
Conflicts that surface in the accounting field are very similar to those that take place in
the legal field. In the world of accounting, conflicts regularly happen when a company
provides various services to the same customer, such as audit, tax, forensic accounting,
and bankruptcy services. The ethical issues and possibility for conflicts surrounding
accounting practices go over simple combining services. They may involve falsifying
documents, underreporting income, illegally evading income taxes, allowing or taking
questionable deductions, and engaging in fraud.
Even though accounting bodies have issued counsel regarding how possible conflicts
can be determined and managed, the way in which they are essentially resolved is
highly subject to professional judgment. A number of big accounting firms have
professional standards groups that assess possible conflicts, and decide if an
assignment must be accepted or declined. But, regardless of the decision made by the
accountant, it is vital still for legal counsel to comprehend how a specific accounting firm
determines conflicts, and identifies if that conflict can be successfully managed.
Executive Compensation
The financial payments and non-monetary benefits given to high level management in
exchange for their work on behalf of a company. The kinds of employees that are
usually paid with executive compensation packages include chief executive officers,
corporate presidents, vice presidents, chief financial officers, managing directors and
other senior executives.
One of the most common ways to assess executive compensation is by comparing pay
and performance. It is unfortunate that a number of executives are given raises and
bonuses even when their companies are struggling. Comparing pay to stock
performance can aid in determining if executives are being overly compensated. The
particular metric used frequently is comparing the change year-over-year in executive
Chapter 8: Ethical Decision-Making: Corporate Governance, Accounting, & Finance
pay increases to the change year-over-year in stock price. If the change in the stock
price outpaces the change in pay, the executive is not overpaid. Another widespread
way to assess executive compensation is to compare an executive to his trade peers.
Most executives should be paid equally as their peers but currently, market leaders
usually have CEOs that are paid a little more than their industries,.
New laws have been passed to help satisfy investor concerns over executive
compensation. Changes in The Securities and Exchange Commission (SEC) reporting
requirements have pushed companies to incorporate an Executive Compensation
Discussion & Analysis portion to go with all future pay documentation in all SEC forms.
Other laws have been more forthright in restraining practices that the companies use.
One example of this was the elimination of the deferred compensation tax shelter that
aided many executives evade millions in taxes. Also, improvements in other tax
loopholes have made it more difficult for boards to rationalize large payouts and hide
these payouts from investors.
Insider Trading
The buying or selling of a security by someone who has access to important confidential
information about the security is called insider trading. It can be illegal or legal
depending on when the trade is made by the insider. It is considered illegal when the
material information is still confidential. Trading while having special knowledge is unjust
to other investors who do not have access to such knowledge.
Illegal insider trading involves tipping others with any kind of confidential information.
Legal insider trading occurs when directors of the company buy or sell shares, but they
disclose their transactions legally. The SEC has policies to protect investments from the
effects of insider trading. Legal insider trading occurs in the stock market weekly. The
SEC necessitates transactions to be electronically submitted promptly and must also be
put on the company’s website.