Corporate Governance and Ethics

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ISBN: 9780471738008 | 047173800X
Cover: Paperback
Copyright: 6/16/2008

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This book is the first to present a comprehensive framework of the theory and practice of corporate governance and business ethics by focusing on the four cornerstones promoted by the AACSB. Readers will quickly gain an understanding of the main themes, perspectives, frameworks, concepts, and issues pertaining to corporate governance and business ethics from historical, global, institutional, commercial, best practices, and regulatory perspectives. Additionally, there is also complete coverage of all oversight functions of corporate governance.

Private Enterprise and Public Trust	p. 1
The Free Market System and Business	p. 3
Introduction	p. 3
Primary Objectives	p. 4
The Free Enterprise System and Capital Markets	p. 4
Public Trust and Investor Confidence	p. 6
The Role and Responsibility of Business in Society	p. 7
The First Tier: Investors	p. 9
The Second Tier: Creditors	p. 11
The Third Tier: Others	p. 11
The Role of Financial Information in the Capital Markets	p. 11
Introduction to Corporate Governance	p. 16
Corporate Culture and Integrity	p. 17
Corporate Accountability	p. 19
Introduction to Business Ethics	p. 20
Classroom Implications of this Book	p. 22
Summary	p. 23
Key Terms	p. 24
Review Questions	p. 24
Discussion Questions	p. 25
Notes	p. 26
Corporate Governance	p. 28
Introduction	p. 28
Primary Objectives	p. 29
Definition of Corporate Governance	p. 29
Aspects of Corporate Governance	p. 30
Shareholder Aspect	p. 30
Stakeholder Aspect	p. 32
Integrated Aspect	p. 32
Corporate Governance Structure	p. 34
Corporate Governance Principles	p. 35
Corporate Governance Functions	p. 41
Corporate Governance Mechanisms	p. 42
Sources of Corporate Governance	p. 44
Corporate Laws	p. 44
The Federal Securities Laws	p. 44
Listing Standards	p. 45
Best Practices	p. 45
Corporate Governance Reforms	p. 45
Sarbanes-Oxley Act of 2002	p. 46
Corporate Governance Rating	p. 49
Corporate Governance Reporting	p. 50
Global Convergence in Corporate Governance	p. 54
Differences between U.S. and European Models of Corporate Governance	p. 55
Summary	p. 56
Key Terms	p. 57
Review Questions	p. 58
Discussion Questions	p. 58
Notes	p. 59
Introduction to Business Ethics	p. 60
Introduction	p. 60
Primary Objectives	p. 61
Ethical Theories	p. 61
Ethics in the Workplace	p. 62
Business Ethics	p. 64
Corporate Culture	p. 65
Incentives	p. 65
Opportunity	p. 66
Choices	p. 66
Triangle of Business Ethics	p. 66
Ethics Sensitivity	p. 67
Ethics Incentives	p. 67
Ethical Behavior	p. 68
SEC Rules on Corporate Code of Ethics	p. 69
Listing Standards	p. 70
Ethics Teaching in Business Schools	p. 71
Ethics in Institutions of Higher Education	p. 74
Professional Ethics	p. 74
Reporting Business Ethics and Conduct	p. 75
Financial Reporting Integrity	p. 78
Organizational Drivers of Integrity in Reporting	p. 81
Summary	p. 82
Key Terms	p. 83
Review Questions	p. 83
Discussion Questions	p. 83
Notes	p. 84
Roles and Responsibilities of Corporate Governance Participants	p. 87
Board of Directors' Roles and Responsibilities	p. 89
Introduction	p. 89
Primary Objectives	p. 90
Role of the Board of Directors	p. 90
Fiduciary Duties of the Board of Directors	p. 93
Duty of Due Care	p. 94
Duty of Loyalty	p. 94
Duty of Good Faith	p. 94
Duty to Promote Success	p. 94
Duty to Exercise Diligence, Independent Judgment, and Skill	p. 95
Duty to Avoid Conflicts of Interest	p. 95
Fiduciary Duties and Business Judgment Rules	p. 95
Board Committees	p. 96
Audit Committee	p. 97
Compensation Committee	p. 97
Governance Committee	p. 97
Nominating Committee	p. 97
Disclosure Committees	p. 97
Special Committee	p. 98
Board Models	p. 98
One-Tier Board Model	p. 98
Two-Tier Board Model	p. 99
Modern Board Model	p. 99
Board Characteristics	p. 100
Board Leadership	p. 100
CEO Duality	p. 101
Lead Director	p. 102
Board Composition	p. 103
Board Authority	p. 103
Responsibilities	p. 103
Resources	p. 104
Board Independence	p. 105
Director Compensation	p. 105
Board Selection	p. 107
Director Education and Evaluation	p. 108
Board Accountability	p. 108
Effective Corporate Boards	p. 110
Director Liability	p. 111
Summary	p. 113
Key Terms	p. 115
Review Questions	p. 115
Discussion Questions	p. 115
Notes	p. 116
Board Committee Roles and Responsibilities	p. 117
Introduction	p. 117
Primary Objectives	p. 117
Relevance of Board Committees	p. 118
Audit Committee	p. 118
Definition of the Audit Committee	p. 119
Audit Committee Relationships with Other Corporate Governance Participants	p. 121
Historical Perspectives on Audit Committees	p. 122
Audit Committee Principles	p. 124
Audit Committee Composition	p. 125
Audit Committee Size	p. 125
Audit Committee Independence	p. 125
Member Qualifications	p. 126
Audit Committee Authority/Resources	p. 127
Audit Committee Responsibility	p. 127
Audit Committee Meetings	p. 130
Audit Committee Agenda	p. 130
Audit Committee Reporting	p. 131
Legal Liability of Audit Committees	p. 132
Evaluation of Audit Committee Effectiveness	p. 133
Audit Committee Evaluation of External Auditors	p. 133
Compensation Committee	p. 133
Structure	p. 134
Responsibilities	p. 134
Proxy Statement Disclosure	p. 135
Compensation Committee Responsibilities	p. 135
Corporate Governance Committee	p. 139
Responsibilities of the Corporate Governance Committee	p. 141
Corporate Governance Reporting/Disclosures	p. 142
Nominating Committee	p. 142
Responsibilities of the Nominating Committee	p. 143
Selection, Nomination, and Election of New Directors	p. 143
Election of Directors	p. 144
Reelection of Incumbent Directors	p. 145
Succession Planning Process	p. 146
Nominating Committee Disclosures	p. 146
Other Board Standing Committees	p. 147
Summary	p. 147
Key Terms	p. 149
Review Questions	p. 149
Discussion Questions	p. 149
Notes	p. 150
Roles and Responsibilities of Management	p. 152
Introduction	p. 152
Primary Objectives	p. 153
Management Responsibilities	p. 153
Operating Process	p. 153
Financial Reporting Process	p. 154
Compliance Process	p. 154
Corporate Officers	p. 155
Chief Executive Officer	p. 155
Chief Financial Officer	p. 157
Corporate Development Officer	p. 157
Chief Risk Officer	p. 158
Chief Internal Control Officer	p. 158
Executive Compensation	p. 159
Components of Executive Compensation	p. 159
Executive Compensation Disclosure	p. 161
Financial Reporting Requirements	p. 161
Small Reporting Companies	p. 163
Financial Reporting Challenges	p. 164
Off Balance Sheet Arrangements Disclosures	p. 165
Aggregate Contractual Commitments	p. 165
Disclosure of Critical Accounting Policies	p. 165
Initial Adoption of Accounting Policies	p. 166
Disclosure of Changes in Existing Accounting Policies	p. 167
Acceleration of Periodic Report Filing Dates and Real-Time Disclosures	p. 167
Non-GAAP Financial Measures	p. 167
Voluntary Changes in Accounting Policies	p. 168
Accounting Pensions and Other Postemployment Benefits	p. 168
Principles-Based versus Rules-Based Accounting Standards	p. 169
Conceptual Framework for Financial Reporting	p. 170
Earnings Management	p. 171
Financial Restatements	p. 172
Convergence in Financial Reporting	p. 175
Internal Control Reporting and Executive Certifications	p. 176
Internal Control Over Financial Reporting	p. 177
Internal Control Evaluations	p. 178
Section 404 Costs	p. 179
Benefits of Section 404 Compliance	p. 180
Sustainable Section 404 Compliance	p. 180
SEC Interpretive Guidance on ICFR	p. 180
Adequacy	p. 181
Effectiveness	p. 181
Entity-Level Controls	p. 181
Ongoing Monitoring	p. 182
Fraud Risk Considerations	p. 182
Amendments to SEC Rules	p. 182
Enterprise Risk Management	p. 182
Tax Accounting	p. 185
Summary	p. 186
Key Terms	p. 187
Review Questions	p. 188
Discussion Questions	p. 188
Notes	p. 189
Regulatory Bodies, Standard Setters, and Best Practices	p. 191
Introduction	p. 191
Primary Objectives	p. 192
Regulations	p. 192
The Sarbanes-Oxley Act of 2002	p. 193
Corporate Governance Provisions	p. 200
Financial Reporting Provisions	p. 200
Audit Function Provisions	p. 201
Enforcement of Federal Securities Laws	p. 201
Provisions Addressing Conduct of Other Individuals	p. 202
Evaluation of the Sarbanes-Oxley Act	p. 202
Global Reach of SOX	p. 203
Securities and Exchange Commission	p. 204
SEC Activities	p. 207
Public Company Accounting Oversight Board	p. 208
PCAOB Responsibilities	p. 208
PCAOB Standard-Setting Process	p. 210
Federal Sentencing Guidelines for Organizations	p. 211
American Institute of Certified Public Accountants	p. 211
AICPA Roles in the Post-SOX Era	p. 211
Financial Accounting Standards Board	p. 213
Government Accounting Standards Board	p. 214
International Federation of Accountants	p. 214
Committee of European Securities Regulators	p. 215
State Influence on Corporate Governance	p. 215
Corporate Governance and Courts	p. 216
Corporate Governance and Self-Regulatory Organizations	p. 216
Best Practices	p. 219
The Conference Board	p. 219
American Law Institute	p. 220
American Bar Association	p. 220
Institutional Investors	p. 220
Council of Institutional Investors	p. 221
National Association of Corporate Directors	p. 222
Business Roundtable	p. 222
Public Pension Funds	p. 222
Summary	p. 222
Key Terms	p. 223
Review Questions	p. 224
Discussion Questions	p. 224
Notes	p. 224
Internal Auditors' Roles and Responsibilities	p. 227
Introduction	p. 227
Primary Objectives	p. 228
Internal Auditing Function and Corporate Governance	p. 228
Internal Auditors as Assurance Providers	p. 230
Internal Auditors as Consultants	p. 230
Trend and Relevance of Internal Auditors	p. 231
Authorities and Responsibilities of Internal Auditors	p. 232
Authority	p. 232
Responsibility	p. 235
Internal Audit Outsourcing	p. 236
Audit Committee Relationship with Internal Auditor	p. 236
Internal Auditors' Role in Internal Control	p. 238
Institute of Internal Auditors	p. 240
Determinants of Effective Internal Audit	p. 243
Best Practices	p. 244
Internal Audit Performance	p. 245
Internal Audit Framework	p. 246
Internal Auditing Education	p. 246
The Internal Audit Opinion on Internal Controls	p. 247
Summary	p. 247
Key Terms	p. 248
Review Questions	p. 248
Discussion Questions	p. 249
Notes	p. 250
External Auditors' Roles and Responsibilities	p. 252
Introduction	p. 252
Primary Objectives	p. 253
External Auditing and Corporate Governance	p. 253
External Auditor Responsibilities	p. 255
Auditor Competency	p. 256
Audit Failures and Audit Quality	p. 257
Public Company Accounting Oversight Board	p. 258
Registration and Inspection of Public Accounting Firms	p. 259
PCAOB Auditing Standards	p. 260
PCAOB Enforcement Investigations	p. 267
Audit Committee Oversight of External Auditors	p. 267
Appointment, Compensation, and Retention of Auditors	p. 268
Preapproval of Audit Services and Permissible Nonaudit Services	p. 268
Review of Independent Auditor Plan for the Integrated Audit	p. 269
Review and Discussion of Financial Reports	p. 269
Monitoring the Auditor's Independence	p. 270
Auditor Rotation Requirement	p. 270
Independent Auditor Communication with the Audit Committee	p. 272
Auditor Independence	p. 273
Consolidation and Competition in Public Accounting Firms	p. 276
Integrated Audit Approach	p. 277
Audit Strategy	p. 277
Audit of Defined Benefit Pensions	p. 279
Auditor Liability Limitation Agreements	p. 279
Summary	p. 283
Key Terms	p. 284
Review Questions	p. 284
Discussion Questions	p. 285
Notes	p. 286
Stakeholders' Roles and Responsibilities	p. 288
Introduction	p. 288
Primary Objectives	p. 289
Shareholders	p. 289
Shareholder Monitoring	p. 291
Shareholder Proxy Process	p. 294
Security Class Actions	p. 295
Institutional Investors	p. 295
Institutional Investors' Monitoring	p. 296
Governance of Institutional Investors	p. 298
Mutual Funds	p. 298
Improving the Oversight Function	p. 299
Chief Compliance Officer	p. 299
Code of Ethics	p. 299
Hedge Funds	p. 300
Investor Activists	p. 300
Employee Monitoring	p. 300
Employee Ownership	p. 301
Employee Roles in Corporate Governance	p. 302
Employee Class Actions	p. 303
Summary	p. 303
Key Terms	p. 304
Review Questions	p. 304
Discussion Questions	p. 304
Notes	p. 305
Roles and Responsibilities of Other Corporate Governance Participants	p. 307
Introduction	p. 307
Primary Objectives	p. 307
Legal Counsel	p. 308
Communication with Legal Counsel	p. 309
SEC Rules of Professional Conduct for Lawyers	p. 310
Responsibilities of Legal Counsel	p. 311
Financial Advisors	p. 312
Securities Analysts	p. 313
Information Flow	p. 315
Analyst Conduct	p. 315
Corporate Communication and Access	p. 316
Reviewing Analyst Reports or Models	p. 316
Issuer-Paid Research Reports	p. 316
Investment Banks	p. 316
Summary	p. 318
Key Terms	p. 318
Review Questions	p. 319
Discussion Questions	p. 319
Notes	p. 319
Contemporary Issues in Business Ethics and Corporate Governance	p. 321
Technology and Corporate Governance	p. 323
Introduction	p. 323
Primary Objectives	p. 323
Information Technology	p. 324
Cybercompany Model	p. 325
Electronic Communication with Shareholders	p. 325
Electronic Commerce	p. 326
Electronic Financial Reporting	p. 326
Extensible Business Reporting Language	p. 327
Costs and Benefits of XBRL	p. 329
XBRL Application	p. 330
Future of XBRL	p. 331
Continuous Auditing	p. 333
Technology Solutions	p. 336
Summary	p. 336
Key Terms	p. 337
Review Questions	p. 337
Discussion Questions	p. 338
Notes	p. 338
Corporate Governance in Private and Not-for-Profit Organizations	p. 340
Introduction	p. 340
Primary Objectives	p. 341
Types of NPOs	p. 341
State and Local Governments	p. 341
Health Care Organizations	p. 341
Colleges and Universities	p. 341
Charitable Organizations	p. 341
Purpose and Role of NPOs	p. 342
Public Trust in NPOs	p. 343
Governance of NPOs	p. 345
Governance of Institutions of Higher Education	p. 345
Ethics in Institutions of Higher Education	p. 346
Applicability of Corporate Governance Reforms to Private Companies and NPOs	p. 347
Governance Structure of NPOs	p. 350
Governance Principles	p. 350
Governance Mechanisms	p. 350
Oversight Function of NPOs	p. 351
Duties of the Board of Directors/Trustees	p. 352
Board Committees	p. 352
Responsibilities of the Board of Directors/Trustees	p. 352
Attributes of Board Members	p. 353
Audit Committees of NPOs	p. 354
Best Practices	p. 355
Internal Control in NPOs	p. 356
Summary	p. 357
Key Terms	p. 358
Review Questions	p. 358
Discussion Questions	p. 358
Notes	p. 359
Corporate Governance in Transition	p. 361
Introduction	p. 361
Primary Objectives	p. 361
Historical Perspective of Corporate Governance	p. 362
Corporate Governance: A Global Perspective	p. 362
Corporate Governance in the United States	p. 365
Corporate Governance in the United Kingdom	p. 368
Corporate Governance in Germany	p. 377
Corporate Governance in Japan	p. 378
Corporate Governance in Other Countries	p. 380
Convergence in Corporate Governance	p. 381
Corporate Governance in Multinational Corporations	p. 390
Summary	p. 391
Key Terms	p. 392
Review Questions	p. 392
Discussion Questions	p. 392
Notes	p. 392
Emerging Issues in Corporate Governance	p. 395
Introduction	p. 395
Primary Objectives	p. 396
Investor Confidence and Global Financial Markets	p. 396
Global Financial Markets	p. 397
Global Corporate Governance	p. 398
Corporate Governance Reporting	p. 400
Accountability: The New Business Imperative	p. 403
Social, Environmental, and Ethics Performance	p. 403
Corporate Social Responsibility	p. 405
Environmental Performance	p. 405
Ethics Performance	p. 406
Shareholder Challenging Issues	p. 406
Nomination Process	p. 406
Voting System	p. 408
Proxy Statements	p. 408
Challenges Facing Directors	p. 409
Director Accountability and Personal Liability	p. 410
Separation of the Chairperson of the Board and CEO Roles	p. 410
Director Compensation and Stock Ownership	p. 411
Executive Compensation	p. 411
Unresolved Director Issues	p. 412
SOX Compliance Challenges	p. 413
Financial Reporting Challenges	p. 414
Financial Restatements	p. 414
Enhanced Business Reporting	p. 415
Stock Options Accounting	p. 415
Antifraud Program and Practices	p. 416
Global Financial Reporting Standards	p. 418
Future of Financial Reporting	p. 421
Pension and OPEB Plans Accounting	p. 422
The Use of Derivatives Speculation	p. 423
Enterprise Risk Management	p. 423
XBRL-Generated Financial Reports	p. 424
Emerging Auditing Issues	p. 425
Auditor Independence	p. 426
Auditor Changes	p. 426
Engagement Letters	p. 426
Audit Failure	p. 426
Integrated Audit Approach	p. 427
Concentration of and Competition in Public Accounting Firms	p. 427
Continuous Auditing	p. 427
Confirmations	p. 427
Audit Report	p. 428
Auditor Liability	p. 428
Audit Implications of Convergence to IFRS	p. 429
Summary	p. 429
Key Terms	p. 430
Review Questions	p. 430
Discussion Questions	p. 431
Notes	p. 431
Index	p. 435
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