To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ACCOUNTING INFORMATION SYSTEMS CONTROLS AND PROCESSES TURNER / WEICKGENANNT CHAPTER 5: Corporate Governance and the Sarbanes-Oxley Act TEST BANK - CHAPTER - TRUE / FALSE Research indicates that companies who stress corporate governance tend to be rewarded with higher rates of return and a lower cost of capital The high cost related to corporate governance far outweighs any of the related benefits The purpose of corporate governance is to encourage the efficient use of resources and to require accountability of those resources The various groups whose interests are related to corporate governance will generally have no conflicts with each other In order to be considered a stakeholder in corporate governance, the participant must be external The management group tends to have an indirect impact on corporate governance, while the business community tends to have a direct affect Even though shareholders are identified as internal stakeholders, they are often regarded as external stakeholders because of the lack of involvement Top management is made up of managers who coordinate a number of different departments or groups within a company and lead the supervisors in their area of responsibility The management team of a corporation is often divided into three layers – top management, middle management, and supervisors 10 The external auditors should approach every audit with an optimistic attitude which will help them to gain more cooperation from the employees within the organization 11 Even though the people and organizations within a community are not directly related to a corporation, they would still be considered one of the stakeholders 12 Internal auditors should not allow any financial connections to influence the decisions they make about the company’s financial statements or disclosures 13 Good management oversight involves leaders who are good communicators - responsive to both those above and below in the chain of command 14 The goal of corporate governance, with respect to internal controls and compliance, is to ensure that financial information is accurate and transparent To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15 Maintaining effective internal controls and ensuring compliance is a six-step process which does not require continual monitoring 16 Earnings management tends to have a snowball effect, which means that once it is started, it is necessary to continue the process in order to avoid a negative result 17 Earnings management is not unethical because it will result in a higher return for the shareholders 18 Because of its widespread relevance, ethical conduct is often valued as the most important part of corporate governance 19 Prior to the passage of the Sarbanes-Oxley Act, an auditing firm was prohibited from providing non-audit services to their clients 20 Before the passage of the Sarbanes-Oxley Act it was common for auditors to perform many non-audit services for their customers 21 Non-audit services are now prohibited because of the potential to impair the auditor’s objectivity 22 Even though non-audit services are prohibited by Sarbanes-Oxley, the auditor may perform income tax services for their audit clients if they are pre-approved by the CEO 23 The auditors report directly to the Board of Directors 24 The Audit Committee is responsible for hiring, firing, and overseeing the audit firm and serving as the liaison between the audit firm and management 25 In order to remain independent, members of the audit committee must receive compensation from the company for their service to the company 26 If an officer of a public company fails to certify financial reports or certifies those that are known to be misleading, the officer may be subject to stiff penalties of up to $1,000,000 and prison term up to years 27 The Sarbanes-Oxley Act contains a section referred to as the “whistle-blower protection” section that is intended to protect a whistleblower from retaliation by the company or its employees 28 The audit committee is the point of contact on financial matters and serves as the supervisor of the board of directors 29 Corporate management serves as supervisors to the board of directors 30 Sarbanes-Oxley has resulted in increased levels of responsibility for business leaders at all levels To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 31 Even if top managers are intent to wrong, it is likely that an organization could develop a set of checks and balances that could completely prevent them from doing so 32 Data mining software has become more important to corporate governance because of its ability to help signal frauds 33 When managers are faced with decision making in troubled times, it is necessary for them to protect as many jobs as possible, regardless of the impact on individual shareholders 34 It is not necessary for the audit committee to maintain independence, as long as they are performing their duties in the proper manner 35 In today’s business environment, there is not a substitute for the integrity and ethics of a company’s leaders ANSWERS TO TEST BANK – CHAPTER – TRUE / FALSE: T F T F F F T 10 11 12 13 14 F T F T F T T 15 16 17 18 19 20 21 F T F T F T T 22 23 24 25 26 27 28 F F T F F T T 29 30 31 32 33 34 35 F T F T F F T TEST BANK - CHAPTER - MULTIPLE CHOICE 36 Which of the following groups would use factors such as those that affect the supply and demand of corporate leaders and tend to emphasize the importance of motivating leaders through the use of incentive programs as part of their definition of corporate governance? A Financiers B Economists C Accountants D Lawyers 37 This group of business would tend to emphasize the role of corporate leaders to provide a good rate of return A Financiers B Economists C Accountants D Lawyers To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 38 This group of business would tend to emphasize the role of corporate leaders as providing effective internal controls and accurate records A Financiers B Economists C Accountants D Lawyers 39 A system of checks and balances where a company’s leadership is held accountable for building shareholder value and creating confidence in the financial reporting process is called: A Internal Control B Tone at the Top C Code of Conduct D Corporate Governance 40 Key A B C D ingredients in the concept of corporate governance include: Motivation of leaders Providing high rates of return and low costs of capital Building value and creating confidence Efficient use of resources 41 The A B C D set of values and behaviors in place for the corporate leaders is referred to as: Corporate Governance Tone at the Top Internal Control Stakeholders 42 There are a number of different participants in the corporate governance process These participants are referred to as: A Leaders B Managers C Shareholders D Stakeholders 43 All of the different people who have some form of involvement or interest in the business are referred to as: A Employees B Stakeholders C Executives D Shareholders 44 The group of people who participate in or with the business in a manner that puts them in a position of financial interest or risk, or is otherwise significant to the overall strategies and operations of a business are called: A Managers B Board of Directors C Stakeholders D Audit Committee To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 45 The A B C D internal stakeholders would not include: Creditors Shareholders Internal Auditors Audit Committee 46 The A B C D internal stakeholders who own a portion of the corporation are called: Directors Shareholders Audit Board Executives 47 This group of stakeholders should have the highest level of authority related to the company’s objectives and strategies Elected by the shareholders, it’s role is to align the interests of the shareholders and management A Audit Committee B Internal Auditors C Board of Directors D Executive Branch 48 This group of stakeholders is responsible for financial matters, including reporting, controls, and the audit function A Audit Committee B External Auditors C Board of Directors D Internal Auditors 49 Which of the following properly identifies the top management level of the management team? A Guide the work of a number of employees doing similar tasks within a department or group B Coordinate a number of different departments within the company by overseeing supervisors C Made up of the company’s president and chief executive officer D Carry out the day-to-day operations and administrative functions of the company 50 This group of stakeholders help management establish and monitor the internal controls for the company They rotate throughout the company, reviewing policies, procedures, and reports in each area to determine whether or not they are working as planned A External Auditors B Internal Auditors C Audit Committee D Top Management To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 51 People and organizations outside the corporation who have a financial interest in the corporation are referred to as: A External Auditors B External Stakeholders C Securities and Exchange Commission D Treadway Commission 52 Which of the following groups is NOT considered to be an external stakeholder? A Audit Committee B External Auditors C Governing Bodies D Customers 53 The purpose of this group of stakeholders is to add credibility to the financial statements They are responsible for evaluating whether or not the financial statements have been prepared according to the established accounting rules A Internal Auditors B Governing Bodies C Audit Committee D External Auditors 54 The governing group is responsible for establishing applicable financial accounting standards in the United States: A COSO B SEC C FASB D IASB 55 This governing group is responsible for establishing applicable financial accounting standards globally: A COSO B SEC C FASB D IASB 56 This governing group is the federal regulatory agency responsible for protecting the interests of investors by making sure that public companies provide complete and transparent financial information: A COSO B SEC C FASB D IASB 57 This A B C D governing group created the framework for internal controls evaluations: COSO SEC FASB IASB To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 58 It is necessary that certain stakeholders remain independent related to the corporation’s financial reporting Which of the following correctly states the stakeholders that should remain independent? A Internal Auditors, Audit Committee and External Auditors B Audit Committee and Internal Auditors C External Auditors and Audit Committee D Both Internal and External Auditors 59 The system of checks and balances in corporate governance includes several interrelated functions Which of the following is not one of those functions? A Management Oversight B Financial Stewardship C Ethical Conduct D Governing Bodies 60 The concept that encompasses the policies and procedures in place to lead the directorship of the company is called: A Financial Stewardship B Management Oversight C Ethical Conduct D Internal Controls and Compliance 61 Which of the following is not typical relationship in an organization chart? A Supervisors report to managers B Managers report to officers C Managers report to supervisors D Officers report to the board of directors 62 According to the authors, the downfall of Enron involved poor management oversight, and included the following criticism(s) of the board of directors: A Board meetings were few and brief B They did not challenge the company’s aggressive accounting policies C Board allowed senior executives to be exempted from the company’s policies regarding conflicts of interest D All of the above 63 The A B C D correctness of the financial information presented is called: Accuracy Transparency Stewardship Fiduciary 64 This characteristic of financial information, relates to how clearly the information can be understood It requires a straightforward, consistent, and timely approach A Accuracy B Financial Stewardship C Fiduciary Duty D Transparency To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 65 Companies that emphasize accuracy and transparency: A Will have internal controls in place to make sure that their financial reports not contradict each other B Will have fewer opportunities for errors or fraud C Will be more likely to prevent opportunities for wrongdoers to cross the line into fraud D All of the above 66 A special obligation of trust, especially with respect to the finances of another, is called: A Financial Stewardship B Fiscal Transparency C Fiduciary Duty D Internal Controls 67 Within the corporate environment, this term means that management has been entrusted with the power to manage the assets of the corporation, which are owned by the shareholders A Fiscal Transparency B Fiduciary C Stewardship D Accuracy 68 The A B C D manner in which an agent handles the affairs and/or finances of another is referred to as: Financial Stewardship Fiscal Transparency Accuracy Fiduciary 69 The most important factors for success in a leader in fulfilling the duty of financial stewardship are: A Financial Stewardship and Fiscal Transparency B Financial Accuracy and Internal Control C Fiduciary Duty and Ethical Conduct D Good Communication and Open Dialogue 70 In order for an environment to thrive where corporate leaders can be good financial stewards: A Well-defined rules and procedures must be in place for decision making B It is necessary to consider objectives at the starting point C Any decision made must be in the best interest of the shareholders D All of the above 71 The act of manipulating financial information in such a way as to shed more favorable light on the company or its management than is actually warranted is referred to as: A Financial accountability B Earnings management C Income performance D Financial stewardship To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 72 Which of the following is not one of the typical earnings management techniques? A Early revenue recognition B Falsification of customers C Creation of non-existent vendors D Early shipment of products 73 According to the authors, the origin of the corporate governance concept in the United States coincides with: A The passage of Sarbanes-Oxley Act B The creation of the Public Company Accounting Oversight Board C The establishment of the SEC and enactment of the securities laws D The Treadway Commission and the ultimate creation of COSO 74 The Securities Act of 1933 requires: A The implementation of a proper climate of internal controls B The full disclosure of financial information through the filing of registration statements before the securities can be sold C Ongoing disclosures for registered companies, in addition to the regulation stock exchanges, brokers, and dealers D The legislation enacted to combat deceptive accounting practices by banks and financial institutions 75 The Securities Exchange Act of 1934 requires: A The implementation of a proper climate of internal controls B The full disclosure of financial information through the filing of registration statements before the securities can be sold C Ongoing disclosures for registered companies, in addition to the regulation stock exchanges, brokers, and dealers D The legislation enacted to combat deceptive accounting practices by banks and financial institutions 76 The A B C D establishment of the SEC and the enactment of securities laws were responses to: The stock market crash of 1929 and the Great Depression of the 1930s Market pressures during the 1980s Increased inflation and cost of capital during the 1970s High-profile accounting scandals in the early 2000s 77 This legislation was enacted in an effort to curb the corruption and accounting blunders that had been discovered in connection with the bankruptcies of corporate giants, such as WorldCom A Securities Exchange Act B US Patriot Act C Sarbanes-Oxley Act D Securities Act To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 78 The A B C D PCAOB was established to carry the provisions of the: Sarbanes-Oxley Act Securities Act US Patriot Act Securities Exchange Act 79 The A B C D Sarbanes-Oxley Act relates to: Private companies and auditors of public companies Public companies Auditors of public companies and public companies Auditors of private companies 80 Auditors of public companies are now prohibited from providing non-audit services to their audit clients as a result of which section of the Sarbanes-Oxley Act: A Section 201 B Section 301 C Section 302 D Section 401 81 Title II of the Sarbanes-Oxley Act relates to auditor independence and includes items such as: A Requiring the lead partner on a public company audit to rotate off the engagement each year B If an auditor is hired away from the audit firm to take a job with the client, there must be a cooling off period of three years if the new job is in a key accounting role C If the auditor’s involvement with the design of the client’s accounting information system and expands into areas of IT system development, then the auditor is considered to have impaired independence D Auditors of public companies are now allowed to provide non-audit services to their audit clients 82 Which of the following is not considered to be a non-audit service? A Preparation of accounting records and financial statements B Investment advisory, investment banking, or brokerage services C External auditing services D Internal audit outsourcing services 83 This section of the Sarbanes-Oxley Act requires that public companies have an audit committee that is a subcommittee of the board of directors A Section 201 B Section 301 C Section 401 D Section 404 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 84 This section of the Sarbanes-Oxley Act requires that the CEO, CFO, and other responsible offices of the company submit a certified statement accompanying each annual and quarterly report acknowledging their responsibility for the contents of the reports and the underlying system of internal controls A Section 301 B Section 401 C Section 302 D Section 404 85 This section of the Sarbanes-Oxley Act requires that there be disclosures in periodic reports disclosing any off-balance-sheet transactions, including obligations or arrangements that may impact the financial position of the company A Section 201 B Section 401 C Section 906 D Section 404 86 This section of the Sarbanes-Oxley Act requires management assessment and reporting of the company’s internal controls A Section 404 B Section 409 C Section 301 D Section 201 87 This section of the Sarbanes-Oxley Act requires that auditors include, as part of their audit procedures, an attestation to the internal control report prepared by management A Section 404 B Section 409 C Section 301 D Section 201 88 This section of the Sarbanes-Oxley Act requires that all public companies have in place a code of ethics covering its CFO and other key accounting officers The code must include principles that advocate honesty and moral conduct, fairness in financial reporting, and compliance with applicable governmental rules and regulations A Section 401 B Section 404 C Section 406 D Section 409 89 The section of the Sarbanes-Oxley Act makes it a felony to knowingly alter, destroy, falsify, or conceal any records or documents with the intent to influence an investigation This provision relates to both the company and its auditors A Section 602 B Section 802 C Section 806 D Section 409 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 90 Someone who reports instances of wrongdoing or assists in a fraud investigation is referred to as a(n): A Ringer B External Auditor C Internal Auditor D Whistleblower 91 This A B C D section of the Sarbanes-Oxley Act is referred to as the “whistleblower protection” provision Section 201 Section 306 Section 806 Section 1102 92 Which of the following describes a difference management oversight as a result of SarbanesOxley? A Management focus has gone from one of strategic decision making and risk management to overall accountability B The board of directors and the audit committee have a lower level of accountability C Members of upper management have the opportunity to focus on overall financial information and can leave the details to subordinates D The jobs of management have been lightened as a result of the certification requirements 93 Which of the following describes a change in internal controls and compliance as a result of the Sarbanes-Oxley Act? A The corporate associates who are responsible for the development and maintenance of the accounting information system have become less important B Although there are new management reporting requirements, the financial reporting has actually decreased C The creation of new reporting requirements has created a large amount of extra work for accountants, IT departments, and executives D A side effect of compliance with the internal control sections of the Act has resulted in a decrease in the amount of accounting information ANSWERS TO TEST BANK – CHAPTER 36 B 48 A 60 37 A 49 C 61 38 C 50 B 62 39 D 51 B 63 40 C 52 A 64 41 B 53 D 65 42 D 54 C 66 43 B 55 D 67 44 C 56 B 68 45 A 57 A 69 46 B 58 C 70 47 C 59 D 71 – MULTIPLE CHOICE: B 72 C C 73 C D 74 B A 75 C D 76 A D 77 C C 78 A B 79 C A 80 A D 81 C D 82 C B 83 B 84 85 86 87 88 89 90 91 92 93 C B A A C B D C A C To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com TEST BANK - CHAPTER – END OF CHAPTER QUESTIONS 94 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 95 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 96 Over time, corporate leaders establish trust by being active leaders, stressing integrity, clarity, and consistency This is referred to as: A Internal control B Corporate governance C Fiduciary duty D Tone at the top 97 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 98 The governing body responsible for establishing the COSO framework for internal controls evaluations is the: A Treadway Commission B SEC C PCAOB D FASB 99 When financial information is presented properly and its correctness is verifiable, it is: A Transparent B Compliant C Accurate D Accountable 100 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 resource consulting regarding personnel for the new division D Income tax return preparation for the new division To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 101 Which of the following is not true regarding the requirements for reporting on internal controls under Section 404 of the Sarbanes-Oxley Act of 2002? A Management must accept responsibility for the establishment and maintenance of internal controls and provide its assessment of their effectiveness B The independent auditor must issue a report on management’s assessment of internal controls C Management must identify the framework used for evaluating its internal controls D Management must achieve a control environment that has no significant deficiencies 102 In the corporate governance chain of command, the audit committee is accountable to: A The company’s vendors and other creditors B Management and employees C Governing bodies such as the SEC and PCAOB D The external auditors 103 Section 806 of the Sarbanes-Oxley Act is often referred to as the whistle-blower 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 of destruction of documents 104 Which of the following is true regarding the post-Sarbanes-Oxley role of the corporate leader? A More emphasis is placed on strategic planning and less emphasis on financial information B The corporate leader must be more in tune with IT to provide corporate governance solutions C The corporate leader must be more focused on merger and acquisition targets D The corporate leader tends to be less involved with the board of directors 105 Many corporate frauds involve: A Managers soliciting assistance from their subordinates B A small deceptive act that intensifies into criminal behavior C An earnings management motive D All of the above ANSWERS END OF CHAPTER QUESTIONS -TEST BANK - CHAPTER 94 95 96 97 B C D D 98 99 100 101 A C D D 102 103 104 105 C C B D To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com TEST BANK - CHAPTER – SHORT ANSWER QUESTIONS 106 Why is tone at the top so important to corporate governance? Answer: Tone at the top is so important because it is the set of values and behaviors in place for corporate leaders As the term suggests, it sets the tone, or pattern, for the entire organization Thus a “bad” tone at the top is likely to filter down and affect all levels of the enterprise 107 Why you think companies that practice good corporate governance tend to be successful in business? Answer: Good corporate governance means that the company leadership is held accountable for building shareholder value and creating confidence in financial reporting processes This accountability means that corporate leaders are more likely to the right thing: that is, they operate efficiently, effectively, and ethically Such companies tend to be more successful 108 Which stakeholder group (internal or external) is more likely to be affected by corporate governance, and which has a direct affect on corporate governance? Answer: External stakeholders are most affected by corporate governance Bad corporate governance is likely to lead to negative consequences for external stakeholders such as creditors or stockholders Internal stakeholders have a more direct effect on the state of corporate governance Those external to the company not have as much influence or control 109 Explain how it is possible that a shareholder could be considered both an internal and external stakeholder Answer: Shareholders are owners of the company and could therefore be considered internal; stakeholders However, in many large corporations, most shareholders own such a small percentage of outstanding shares that they have little to no influence on the corporation Thus, they could be considered external stakeholders 110 Why is the Board of Directors considered an internal stakeholder group, when it is required to have members who are independent of the company? Answer: Because the board of directors has the highest level of authority with respect to company objectives and strategies, it is considered an internal stakeholder group Therefore, it has a direct and strong influence on the governance of the enterprise 111 How can internal auditors maintain independence, since they are employees of the company? Answer: Internal auditors should not have any reporting relationship or conflicting roles that impact their objectivity on the job For example, internal auditors often report to the audit committee so that they are not reporting to a manager who would lead to a conflict of interest If internal auditors report to the CEO or CFO, those parties are more likely to have an interest in hiding any fraudulent or unacceptable behavior 112 Identify the four functions of the corporate governance process Answer: The four functions of the corporate governance process are: management oversight, internal controls and compliance, financial stewardship, and ethical conduct To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 113 Describe the key connection between tone at the top and management oversight Answer: Management oversight is the set of policies and practices in place to lead the directorship of the company This set of policies and practices, if consistently demonstrated by management, should set a good tone at the top 114 Explain the connection between fiduciary duty and financial stewardship Answer: Fiduciary duty means that management has been entrusted the power to manage assets of the corporation, which are in turn owned by the shareholders Financial stewardship is the obligation of the fiduciary to treat these assets with discipline, respect, and accountability 115 Why is it that many accountants claim that corporate governance was born in the 1930s? Answer: The stock market crash of 1928 is believed to have been caused by misleading accounting and reporting practices The federal government responded by passing both the Securities Act of 1933 and the Securities Exchange Act of 1934 These were the first regulations to attempt to require management accountability to investors, so they are thought of as the birth of corporate governance 116 What is the primary difference between the Securities Act of 1933 and the Securities Exchange Act of 1934? Answer: The Securities Act of 1933 requires full financial disclosure before securities can be sold, while the Securities Exchange Act of 1934 requires ongoing disclosure for registered companies 117 Why did the SEC establish the PCAOB? Answer: The PCAOB was established to govern the work of auditors of public companies The PCAOB provides standards for audits, and has investigative and disciplinary authority over public accounting firms 118 Why can auditors no longer be involved in helping their audit clients establish accounting information systems? Answer: Around the period of discussion on the upcoming Sarbanes-Oxley act, there was a general perception in public that this type of consulting engagement impaired the independence of auditors There was concern that a firm that helped design an accounting system could not be independent in assessing the effectiveness and reliability of that accounting system To enhance independence, the Sarbanes-Oxley Act prohibited such consulting engagements 119 Under what conditions are auditors permitted to perform non-audit services for their audit clients? Answer: Non-audit services are permitted only if the auditor has obtained prior approval from the client’s audit committee 120 How has the Sarbanes-Oxley Act increased the importance of audit committees in the corporate governance process? Answer: The SOX Act places much more responsibility on the audit committee On financial matters, the audit committee is to supervise the board of directors, which in turn supervises corporate management The audit committee must be independent and it is responsible for hiring, firing, and overseeing the external auditors The external auditors report to the audit committee on all audit related matters Some companies may have followed these practices prior to 2002, but SOX now requires the use of these practices To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 121 Identify the six financial matters that must be certified by a company’s top officers under the requirements of Section 302 of the Sarbanes-Oxley Act Answer: The following matters must be certified by a company’s top officers: (1) the signing officers have reviewed the report in detail; (2) based on the signing officer’s knowledge, the report does not misstate any facts; (3) based on the signing officer’s knowledge, the financial statements and related disclosures are fairly presented; (4) the signing officers are responsible for the establishment, maintenance, and effectiveness of internal controls; (5) the signing officers have disclosed to the auditors and audit committee any instances of fraud or internal control deficiencies; (6) the signing officers indicate whether or not any significant changes in internal controls have occurred since the date of their most recent evaluation 122 Explain the relationship between Section 401 of the Sarbanes-Oxley Act and the concept of transparency Answer: Transparency in financial reporting implies that nothing is hidden from the view of readers of financial statements Section 401 requires new disclosure information on the financial statements for off-balance-sheet transactions This ensures that off-balance-sheet transactions are not hidden from readers 123 Explain the difference between management’s responsibility and the company’s external auditors’ responsibility regarding the company’s internal controls under Section 404 of the Sarbanes-Oxley Act Answer: Under section 404 of the SOX Act, the CEO and CFO have the responsibility to maintain a proper system of internal control Management must assess the effectiveness of the internal control system based on an established framework such as COSO The external auditor must review the internal controls and attest to the effectiveness of the internal controls 124 Explain why Section 409 of the Sarbanes-Oxley Act has placed more pressure on members of IT departments within public companies Answer: Section 409 of the SOX Act requires real-time disclosures of important corporate events such as bankruptcy, new contracts, acquisitions and disposals, and changes in control This real-time reporting requires that the company’s accounting systems track such events in real-time Therefore, IT departments must help establish and maintain IT systems capable of achieving these reporting requirements 125 How is the Sarbanes-Oxley Act forcing corporations to become more ethical? Answer: The SOX Act requires all public companies to have a code of ethics in place This does not guarantee that ethical conduct will occur, but it at least informs managers and employees that they are expected to act ethically 126 Why corporate leaders see their jobs as more risky since the Sarbanes-Oxley Act became effective? Answer: There are several “sign-offs” that corporate leaders must If a corporate officer signsoff without due care or fraudulently, he or she can be subject to penalties 127 Which governing body holds the top position of management oversight? Answer: The corporate board of directors holds the top management oversight position To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 128 Identify two ways that companies are making efforts to improve the financial stewardship of their managers Answer: In order to improve the financial stewardship of their managers, some companies are offering training programs to assist managers in understanding their stewardship responsibilities and some have made adjustments to management incentive compensation packages to reduce the temptation to manage earnings 129 How can IT departments assist corporate managers in fulfilling their corporate governance roles? Answer: A company’s IT infrastructure is a very important system for allowing management access to the information they need to ensure compliance with corporate governance guidelines The IT system can also help ensure managers and employees are trained on ethics and corporate governance The chapter mentions the example of BASF that supplies ethics training via the Internet 130 How is it that management’s role as financial stewards may be considered a conflict of interest with their position as employees of the company? Answer: Managers often have compensation plans in which incentives are tied to company earnings This may lead to a conflict between what is in the best interest of shareholders and the best interest of the manager or employees Often what is in the best interest of employees or management is not in the best interest of the shareholders TEST BANK - CHAPTER – SHORT ESSAY 131 Why are shareholders sometimes considered internal stakeholders and sometimes considered external stakeholders? Answer: Shareholders are owners of the company and could therefore be considered internal stakeholders However, in many large corporations, most shareholders own such a small percentage of outstanding shares that they have little to no influence on the corporation Thus, they could be considered external stakeholders 132 Is it possible for financial information to be accurate but not transparent? Similarly, is it possible for financial information to be transparent but not accurate? Explain Answer: Yes, it is possible for information to be accurate but not transparent For example, if a company accurately reports information on the face of the financial statements but neglects to disclose appropriate explanatory information in the footnotes, then transparency is compromised On the other hand, a company can be thorough in providing supplementary information that is needed to understand and analyze the financial statement amounts, even though there are errors in the reporting of those amounts To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 133 Earnings management involves lying about the company’s financial results in order to provide a more favorable impression to investors Earnings management is discussed in the section on financial stewardship Explain how the other three functions of corporate governance can work together to help prevent earnings management within a corporation Answer: Besides financial stewardship the other three functions of corporate governance are management oversight, internal controls and compliance, and ethical conduct Even if there are weaknesses in financial stewardship that allow for the possibility of earnings management, these other three functions should prevent this If effective management oversight is practiced whereby supervision and communication are key to the ongoing processes, manipulations of financial information should be caught by the diligent managers who oversee the financial reporting function In addition, the system of internal controls should provide for the assignment of rights and responsibilities and compliance with accounting conventions in a manner that encourages accuracy and transparency of financial information Furthermore, creating and maintaining a culture of honesty and accountability is inconsistent with the practice of earnings management Accordingly, these strengths of the other components of corporate governance are expected to overcome any weakness in financial stewardship that might create an opportunity for earnings management 134 Describe how the characteristics of the financial markets in the 1980s eventually led to the creation of the Sarbanes-Oxley Act of 2002 Answer: In the 1980s, there was intense pressure for companies to met or beat their earnings targets As a result, creative accounting practices became more common Even in the following decade, these irregularities became so severe that a series of high-profile corporate accounting scandals erupted The losses suffered as a result of these corporate scandals were so significant that many investors demanded that new legislation be introduced in order to prevent repeat instances of these problems The SOX Act was the result 135 Although the Sarbanes-Oxley Act of 2002 applies to public companies, many private business organizations have been impacted by this legislation, especially if they are suppliers to a public company Explain how this external stakeholder relationship can lead to the widespread application of Section 404 of the Act Answer: For many of the public companies which are doing business with private companies, the requirements of the SOX Act are being superimposed upon the private companies In order for the public company to comply with the SOX Act, it must be assured that its trading partners also maintain effective controls As a result, many private companies are complying with the SOX Act in order to protect their business relationships 136 Describe at least three ways that the Sarbanes-Oxley Act and the increased emphasis on corporate governance have put more attention on the role of those responsible for the company’s accounting information systems Answer: IT departments are expected to help management achieve compliance with new legislation by leveraging technology so that financial processes can be relied upon to provide accurate information Secondly, many corporate managers are demanding more electronic recordkeeping to provide timely information, but that requires an IT infrastructure that supports the company’s strategies and goals Finally, since most corporate managers not have time to collect data, they need to have information that is readily accessible To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 137 Why you think it is particularly challenging for companies to maintain ethical behavior during difficult financial times? Answer: During difficult financial times, it is particularly challenging for companies to maintain ethical behavior because of the conflict of interest for managers in their role as financial stewards of the business Management may be inclined to act in a way that protects their job or their employees at the expense of the shareholders Earnings management techniques are an easy solution to this conflict TEST BANK - CHAPTER – Problems 138 List the six steps for establishing internal controls and describe how this process leads to stronger overall corporate governance Answer: The six-step process for internal controls includes the following: Define the key activities and resources involved in each business activity Define the objectives of each activity Obtain input from experienced users and advisors on the effective design of controls Formally and thoroughly document the details of the controls Test the effectiveness of controls to make sure they are operating as designed Engage in continuous improvement to fix problems and upgrade controls These steps help to establish a thorough understanding of processes as the foundation for an effective system It also provides for documenting, monitoring, and improving the system as needed This provides for accurate and transparent financial reporting 139 List the items that must be certified by corporate management in accordance with the provisions of the Sarbanes-Oxley Act Discuss how these responsibilities have likely changed the period-to-period activities of the certifying managers Answer: Top managers must submit a certified statement to accompany each annual and quarterly report to acknowledge their responsibility for the contents of the financial reports and the underlying system of internal controls The specific points include acknowledgments that: They have reviewed the report in detail The report does not misstate any facts The financial statements and related disclosures are fairly presented They are responsible for the establishment, maintenance, and effectiveness of internal controls They have disclosed any instances of fraud or internal control deficiencies They have indicated whether or not any significant changes in internal controls have occurred since the date of their most recent evaluation The responsibilities inherent in these certified statements have likely resulted in significant changes in the activities of the signing officers Specifically, the certifying officers can no longer delegate responsibility for the detailed accounting functions to their subordinates These officers must become knowledgeable about the details in order to facilitate these certifications Moreover, since the certifications must be filed quarterly, this new attention to detailed accounting information must be a continuous responsibility To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 140 Identify the costs and benefits of complying with the Sarbanes-Oxley Act of 2002 Do you think the costs are justified? Answer: The costs of complying with SOX are high, and have ranged from some companies’ complete overhaul of operations to other companies’ mere revisions in reporting and documentation In addition, most companies have also seen increases in their audit costs, as auditors also have increased responsibilities as a result of SOX On the other hand, some companies have realized benefits from the requirements of SOX, including enhanced performance as a result of improved internal controls Students’ responses to the question of SOX’s justification are likely to be mixed Some may criticize SOX for its extreme requirements and minimal benefits, as well as the resulting shift in managerial focus from large scale, strategic issues to detailed reporting requirements They may agree that SOX was enacted hastily in response to a few bad cases of corruption that are not necessarily representative of America’s corporate control environment as a whole However, others may appreciate the opportunity that SOX has presented for improving corporate controls Some SOX proponents believe that the benefits are likely to be realized gradually as companies increase their awareness of internal controls and streamline their business processes accordingly 141 Using an Internet search engine (such as Google, Dogpile, Lycos), determine who was the whistleblower at Enron Summarize the circumstances What was the relationship of this person with the company? Was this an internal or external stakeholder? Answer: The whistleblower at Enron was Sherron Watkins, an internal stakeholder who held the position of Vice President for Corporate Development In 2001, she wrote a letter to Enron founder Ken Lay to warn him of the company’s impending financial problems if he did not come clean about potentially disastrous accounting tricks She also shared her concerns with a friend at Arthur Anderson, her former employer and Enron’s audit firm 142 Using an Internet search engine (such as Google, Dogpile, Lycos), search for the terms “guilty as charged” + “California Micro Devices” in order to find an article about the company, California Micro Devices Identify the related corporate governance issues Answer: Two top-ranking executives at California Micro Devices were convicted of accounting fraud, including securities fraud and insider trading As top executives, they were in a position of trust The federal prosecutors in their case indicated that it was important to send a message about the seriousness of their crimes, the importance of their roles within the company, and the need for severe punishment for the abusive accounting schemes that were carried out To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 143 There are five types of management earnings techniques presented in this chapter Provide two or three specific examples of how corporate leaders could pull off these types of fraud, as well as the internal control activities that could be used to prevent them Answer: Student responses are likely to vary but may include the following fraud schemes, each of which may be particularly effective if conducted near year-end: • Early recognition of revenues, such as when management loads the sales pipeline with customer transactions that will actually be carried out in the next accounting period rather than the current period; i.e., channel stuffing • Early shipment of products, such as when management authorizes premature shipment of goods to customers This is often done for customers who place routine or recurring orders, so management assumes that it will be able to pull off this accounting stunt by sending a shipment for a transaction that has not yet been taken place Even if the customer refuses the shipment and returns the goods, such is likely to occur in the next accounting period, so the fraudulent sale would still be recorded in the current period • Falsification of customers, such as when bogus customers are created in the accounting records and bogus sales transactions are developed to inflate the company’s revenues Fictitious supporting documents may be created to give the impression of a legitimate transaction with a valid customer • Falsification of invoices or other records may occur in an attempt to force more sales transactions into the current period’s accounting records For instance, sales invoices and related shipping documents may be backdated so that they are included in the prior period • Allowing customers to take products without taking title to the products, such as forcing a trial period upon them Management may attempt this, hoping that the customers may decide to carry out the transaction Even if the customer returns the goods, such is likely to occur in the next accounting period, so the fraudulent shipment and sales would still be recorded in the current period  ... above ANSWERS END OF CHAPTER QUESTIONS -TEST BANK - CHAPTER 94 95 96 97 B C D D 98 99 100 101 A C D D 102 103 104 105 C C B D To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... B D C A C To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com TEST BANK - CHAPTER – END OF CHAPTER QUESTIONS 94 Which of the following is not considered... control sections of the Act has resulted in a decrease in the amount of accounting information ANSWERS TO TEST BANK – CHAPTER 36 B 48 A 60 37 A 49 C 61 38 C 50 B 62 39 D 51 B 63 40 C 52 A 64