2. Accounting Information Systems, 1st Edition
Corporate Governance and the Sarbanes-Oxley Act
Accounting Information Systems, 1st Edition

3. Study Objectives An overview of corporate governance
Participants in the corporate governance process
The functions within the corporate governance process
The history of corporate governance
The Sarbanes–Oxley Act of 2002
The impact of the Sarbanes–Oxley Act on corporate governance
The importance of corporate governance in the study of accounting information systems
Ethics and corporate governance
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. An Overview of Corporate 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.
SO 1 An overview of corporate governance

5. An Overview of Corporate Governance
Concept Check
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.
SO 1 An overview of corporate governance

6. An Overview of Corporate Governance
Concept Check
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.
SO 1 An overview of corporate governance

7. An Overview of Corporate Governance
Concept Check
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.
SO 1 An overview of corporate governance

8. Participants in Corporate Governance Process
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.
SO 2 Participants in the corporate governance process
SO 1 An overview of corporate governance

9. Participants in Corporate Governance Process
Exhibit 5-1
Stakeholders as participants in the corporate governance process
Internal Stakeholders
Shareholders
Board of directors
Audit committee
Management
Employees
Internal auditors

10. Participants in Corporate Governance Process
Exhibit 5-1
Stakeholders as participants in the corporate governance process
External Stakeholders
External auditors
Governing bodies
Communities
Investors
Creditors
Customers and suppliers

11. Participants in Corporate Governance Process
Concept Check
The governing body responsible for establishing the COSO framework for internal controls evaluations is the
a. Treadway Commission.
b. SEC.
c. PCAOB.
d. FASB.

12. Functions Within Corporate Governance Process
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.
SO 3 The functions within the corporate governance process

13. Functions Within Corporate Governance Process
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.
SO 3 The functions within the corporate governance process

14. Functions Within Corporate Governance Process
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
SO 3 The functions within the corporate governance process

15. Functions Within Corporate Governance Process
Ethical Conduct
Integrity, fairness, and accountability are the underlying concepts in each of the roles of corporate governance.
SO 3 The functions within the corporate governance process

16. Concept Check Functions Within Corporate Governance Process
When financial information is presented properly and its correctness is verifiable, it is
a. transparent.
b. compliant.
c. accurate.
d. accountable.
SO 3 The functions within the corporate governance process

17. History of Corporate 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.
SO 4 The history of corporate governance

18. Sarbanes–Oxley Act of 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.
SO 5 The Sarbanes-Oxley Act of 2002

19. Sarbanes–Oxley Act of 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.
SO 5 The Sarbanes-Oxley Act of 2002

20. Sarbanes–Oxley Act of 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.
SO 5 The Sarbanes-Oxley Act of 2002

21. Concept Check Sarbanes–Oxley Act of 2002
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.
SO 5 The Sarbanes-Oxley Act of 2002

22. Concept Check Sarbanes–Oxley Act of 2002
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.
SO 5 The Sarbanes-Oxley Act of 2002

23. Impact of Sarbanes–Oxley Act
Management Oversight
More knowledgeable about accounting principles and financial systems.
Management certification of financial information.
Rigid penalties for noncompliance.
SO 6 The impact of the Sarbanes–Oxley Act on corporate governance

24. Impact of Sarbanes–Oxley 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.
SO 6 The impact of the Sarbanes–Oxley Act on corporate governance

25. Impact of Sarbanes–Oxley 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
SO 6 The impact of the Sarbanes–Oxley Act on corporate governance

26. Concept Check Impact of Sarbanes–Oxley Act
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.
SO 6 The impact of the Sarbanes–Oxley Act on corporate governance

27. Concept Check Impact of Sarbanes–Oxley Act
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.
SO 6 The impact of the Sarbanes–Oxley Act on corporate governance

28. Corporate Governance in the Study of AIS
The Sarbanes–Oxley Act heightens the business value of financial information. Since the Act requires more financial information and faster financial reporting, there is more attention than ever on the importance of the accountants and IT personnel who provide financial information for the company.
SO 7 Importance of corporate governance in the study of AIS

29. Ethics and Corporate Governance
Internal stakeholders may sometimes have difficult ethical choices to make when their personal interests conflict with the interests of shareholders.
Corporate governance must provide the structure to make sure that a system of financial stewardship is maintained, even when times get tough.
SO 8 Ethics and corporate governance

30. Concept Check Ethics and Corporate Governance
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.
SO 8 Ethics and corporate governance

31. Copyright
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