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Module 4 Regulations IN Corporate Governance
Financial Accounting (AE 111)
University of San Agustin
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MODULE 4 REGULATIONS IN CORPORATE GOVERNANCE
1. What is the Sarbanes Oxley Act? Summarize/outline the important sections, benefits and costs.
The Sarbanes-Oxley Act or also known as SOX Act is a United States federal law that aims to protect investors by requiring more reliable and more accurate corporate disclosures. It was spearheaded by Senator Paul Sarbanes and Representative Michael Oxley, and the Act was signed into law by then President George W. Brush on July 30, 2002. SOX Act comprises important sections and these are the following: ● Section 302 - This section requires financial statements for external reporting purposes to be certified by the CEO and CFO. This also requires corporate executives to perform a careful review of the amounts and disclosures reflected in the financial statements, thereby increasing the reliability of the reports. ● Section 401 - This section requires financial statements to be accurate. It should reflect disclosures of any off balance liabilities, transactions, or obligations. ● Section 404 - This section requires management to make an assessment of the effectiveness of the company's internal controls over the financial reporting process. ● Section 409 - This section requires companies to urgently disclose drastic changes in their financial position or operations, including acquisitions, divestments, and major personnel departures. The changes are to be presented in clear, unambiguous terms. ● Section 802 - This section outlines two penalties for destroying documentary evidence and obstructing investigations of a corporate fraud namely: a. Any company official found guilty of concealing, destroying, or altering documents, with the intent to disrupt an investigation could face up to 20 years in prison and applicable fines. b. Any accountant who knowingly aids company officials in destroying, altering, or falsifying financial statements could face up to 10 years in prison. (Benefits) After the implementation of the SOX Act, financial crimes and accounting fraud became less frequent. Also, the SOX significantly increased the fines for public companies committing the same offense. Thus, investors benefited by having access to more reliable information and were able to have a sound basis for their investment decision.
(Costs) According to a 2006 SEC report, small firms with a market capitalization of less than $ million faced compliance costs averaging 2% of revenues, whereas larger firms only paid an average of 0% of revenue.
2. Briefly discuss the main areas of the OECD Principles of Corporate Governance?
There are six key areas of OECD principles of Corporate Governance, these are:
● Ensuring the basis for an effective corporate governance framework - Promotes a transparent and efficient market, following the rules of law and articulating the division of work among supervisory, regulatory, and enforcement authorities.
● The rights of shareholders - It is to protect and promote the exercise of shareholders' rights.
● The equitable treatment of shareholders - All types of shareholders shall be treated with equity. All shareholders should be given effective redress for violation of their rights.
● The role of stakeholders in corporate governance - The corporate governance framework should acknowledge the stakeholder rights enforced by law or through mutual understandings and promote active collaboration between corporations and stakeholders while establishing wealth, employment, and the long-term viability of financially stable businesses
● Disclosure and transparency - The corporate governance framework should assure that all material matters are disclosed promptly and accurately regarding the aspects pertaining to the company, such as its financial status, performance, ownership, and governance of a company.
● The responsibilities of the board - The corporate governance framework should guarantee the company's strategic direction, the board's ability to effectively oversee management and its responsibility to the company and its shareholders.
3. Briefly discuss the SEC Principles of Corporate Governance.
Principle 1- Establishing a Competent Board
The board should endeavor to exercise an objective and independent judgment on all corporate affairs.
- Having the presence of independent directors in the Board will ensure the exercise of independent judgment on corporate affairs and proper oversight of managerial performance, including prevention of conflict of interests and balancing of competing demands of the corporation.
Principle 6 - Assessing Board Performance
The best measure of the Board’s effectiveness is through an assessment process. The Board should regularly carry out evaluations to appraise its performance as a body, and assess whether it possesses the right mix of backgrounds and competencies.
- Board assessment helps the directors to thoroughly review their performance and understand their roles and responsibilities. The periodic review and assessment of the Board’s performance as a body, the board committees, the individual directors, and the Chairman show how the aforementioned should perform their responsibilities effectively
Principle 7- Strengthening Board Ethics
Members of the Board are duty-bound to apply high ethical standards, taking into account the interests of all stakeholders.
- A Code of Business Conduct and Ethics that is suitable to the needs of the company and the culture by which it operates is an important tool to instill an ethical corporate culture that pervades throughout the company. To ensure proper compliance with the Code, appropriate orientation and training of the Board, senior management and employees on the same are necessary.
Principle 8 - Enhancing Company Disclosures
The company should establish corporate disclosure policies and procedures that are practical and in accordance with best practices and regulatory expectations.
- It is necessary as it ensures that systems and processes are designed to provide assurance in such areas including reporting, monitoring compliance with laws, regulations and internal policies, efficiency and effectiveness of operations, and safeguarding of assets.
Principle 9 - Strengthening the External Auditor’s Independence and Improving Audit Quality
The company should establish standards for the appropriate selection of an external auditor, and exercise effective oversight of the same to strengthen the external auditor’s independence and enhance audit quality.
- The Audit Committee should have a robust process for approving and recommending the appointment, reappointment, removal, and fees of the external auditor
Principle 10 - Increasing Focus on Nonfinancial and Sustainability Reporting
The company should ensure that the material and reportable non-financial and sustainability issues are disclosed. Companies should adopt a globally recognized standard framework in reporting sustainability and nonfinancial issues.
- As crucial as the information's actual content is how it is conveyed to the audience for whom it is meant. Consequently, the organization needs a strategic and well-structured reporting channel. These channels of communication can disseminate timely and current information that is pertinent to investors' decisions as well as those of other interested parties.
Principle 11 - Promoting Access to Relevant Information
The company should maintain a comprehensive and cost-efficient communication channel for disseminating relevant information. This channel is crucial for informed decision-making by investors, stakeholders and other interested users.
- It is critical for the company to have a strategic and well-organized reporting channel. These communication channels can provide timely and up-to-date information relevant to investors’ decision-making, as well as to other interested stakeholders.
Principle 12 - Strengthening the Internal Control And Risk Management Systems
To ensure the integrity, transparency and proper governance in the conduct of its affairs, the company should have a strong and effective internal control system and enterprise risk management framework.
- A separate internal audit function is essential to monitor and guide the implementation of company policies. It helps the company accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of the company’s governance, risk management and control functions.
Principle 13- Promoting Shareholder Rights
The company should treat all shareholders fairly and equitably, and also recognize, protect and facilitate the exercise of their rights.
- It is the Board's responsibility to adopt a policy informing shareholders of all their rights. Shareholders are encouraged to exercise their rights by establishing clear processes and procedures.
Module 4 Regulations IN Corporate Governance
Course: Financial Accounting (AE 111)
University: University of San Agustin
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