1 Chapter 2 Corporate Governance and Ethics

2 Introduction Companies need strong corporate governance and sound ethical practices: Scandals cause the public to lose faith in the company Strong governance and sound ethics serve to make management more accountable to a range of stakeholders, including employees, investors, and customers Both internal and external forces shape a company’s system of corporate governance and internal control

3 Corporate Governance Corporate governance systems are used by a company to promote fairness, complete and accurate financial reporting, and accountability.

4 Elements of Internal Control The Control Environment Risk Assessment Control Activities Information & Communication Monitoring

5 The Importance of Ethics Business ethics: The interaction of personal morals with the processes and objectives of business

6 The Importance of Ethics Integrity is the cornerstone of ethical business practices  Failure to build a business on integrity carries costs  May lower employee morale, reduce customer loyalty, harm a company’s standing in the community

7 Stakeholder Analysis A stakeholder analysis approach is useful for identifying stakeholders and the social, legal, ethical, and economic responsibilities to those stakeholders.

8 Ethics Programs Ethics Programs include:  Written codes of ethics  Employee hotlines and ethics call centers  Training programs  Ethics offices

9 Code of Ethics Three common types of codes of ethics include codes of conduct, mission statements, and corporate philosophy statements.

10 Fraud Defined as a 1) Knowingly false representation of a material fact made by a party 2) With the intent to deceive and induce another party to justifiably rely on the representation to his or her detriment

11 Types of Fraud There are two types of fraud: fraudulent financial reporting and misappropriation of assets.

12 Causes of Fraud People engage in fraudulent activity as a result of an interaction of forces within an individual and the external environment. Combinations of pressure, opportunity, and attitude are likely to lead to fraud  The Fraud Triangle