Showing posts with label Corporate Governance. Show all posts
Showing posts with label Corporate Governance. Show all posts
THE SARBANES–OXLEY ACT AND CORPORATE GOVERNANCE BASIC INFORMATION AND TUTORIALS
Section 404 of the Sarbanes–Oxley Act—‘‘Enhanced Financial Disclosures, Management Assessment of Internal Control’’—mandates sweeping changes.
Section 404, in conjunction with the related Securities and Exchange Commission (SEC) rules and Auditing Standard No. 2 established by the Public Company Accounting Oversight Board (PCAOB), requires management of a public company and the company’s independent auditor to issue two new reports at the end of every fiscal year.
These reports must be included in the company’s annual report filed with the SEC. Management must report annually on the effectiveness of the company’s internal control over financial reporting.
In conjunction with the audit of the company’s financial statements, the company’s independent auditor must issue a report on internal control over financial reporting, which includes both an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting.
In the past, a company’s internal controls were considered in the context of planning the audit but were not required to be reported publicly, except in response to the SEC’s Form 8-K requirements when
elated to a change in auditor.
The new audit and reporting requirements have drastically changed the situation and have brought the concept of internal control over financial reporting to the forefront for audit committees, management, auditors, and users of financial statements.
The new requirements also highlight the concept of a material weakness in internal control over financial reporting, and mandate that both management and the independent auditor publicly report any material weaknesses in internal control over financial reporting that exist as of the fiscal-year-end assessment date.
Under both PCAOB Auditing Standard No. 2 and the SEC rules implementing Section 404, the existence of a single material weakness requires management and the independent auditor conclude that internal control over financial reporting is not effective.
US TREASURY AND GOVERNMENT AGENCY SECURITIES BASIC INFORMATION AND TUTORIALS
WHAT ARE US TREASURY AND GOVERNMENT AGENCY SECURITIES - FINANCIAL MANAGEMENT
U.S. Treasury Securities
All government securities issued by the U.S. Treasury are fixedincome instruments. They may be bills, notes, or bonds depending on their times to maturity.
Specifically, bills mature in one year or less, notes in over one to 10 years, and bonds in more than 10 years from time of issue. U.S. government obligations are essentially free of credit risk because there is little chance of default and they are highly liquid.
U.S. Government Agency Securities
Agency securities are sold by various agencies of the government to support specific programs, but they are not direct obligations of the Treasury.
Examples of agencies that issue these bonds include the Federal National Mortgage Association (FNMA or Fannie Mae), which sells bonds and uses the proceeds to purchase mortgages from insurance companies or savings and loans; and the Federal Home Loan Bank (FHLB), which sells bonds and loans the money to its 12 banks, which in turn provide credit to savings and loans and other mortgage-granting institutions.
Other agencies are the Government National Mortgage Association (GNMA or Ginnie Mae), Banks for Cooperatives, Federal Land Banks (FLBs), and the Federal Housing Administration (FHA).
Although the securities issued by federal agencies are not direct obligations of the government, they are virtually default-free because it is inconceivable that the government would allow them to default.
Also, they are fairly liquid. Because they are not officially guaranteed by the Treasury, they are not considered riskless. Also, because they are not as liquid as Treasury bonds, they typically provide slightly higher returns than Treasury issues.
U.S. Treasury Securities
All government securities issued by the U.S. Treasury are fixedincome instruments. They may be bills, notes, or bonds depending on their times to maturity.
Specifically, bills mature in one year or less, notes in over one to 10 years, and bonds in more than 10 years from time of issue. U.S. government obligations are essentially free of credit risk because there is little chance of default and they are highly liquid.
U.S. Government Agency Securities
Agency securities are sold by various agencies of the government to support specific programs, but they are not direct obligations of the Treasury.
Examples of agencies that issue these bonds include the Federal National Mortgage Association (FNMA or Fannie Mae), which sells bonds and uses the proceeds to purchase mortgages from insurance companies or savings and loans; and the Federal Home Loan Bank (FHLB), which sells bonds and loans the money to its 12 banks, which in turn provide credit to savings and loans and other mortgage-granting institutions.
Other agencies are the Government National Mortgage Association (GNMA or Ginnie Mae), Banks for Cooperatives, Federal Land Banks (FLBs), and the Federal Housing Administration (FHA).
Although the securities issued by federal agencies are not direct obligations of the government, they are virtually default-free because it is inconceivable that the government would allow them to default.
Also, they are fairly liquid. Because they are not officially guaranteed by the Treasury, they are not considered riskless. Also, because they are not as liquid as Treasury bonds, they typically provide slightly higher returns than Treasury issues.
CORPORATE GOVERNANCE BASICS AND TUTORIALS
WHAT IS CORPORATE GOVERNANCE?
Corporate governance refers to the rules, processes, and laws by which companies are operated, controlled, and regulated. It defines the rights and responsibilities of the corporate participants such as the shareholders, board of directors, officers and managers, and other stakeholders, as well as the rules and procedures for making corporate decisions.
A well-defined corporate governance structure is intended to benefit all corporate stakeholders by ensuring that the firm is run in a lawful and ethical fashion, in accordance with best practices, and subject to all corporate regulations.
A firm’s corporate governance is influenced by both internal factors such as the shareholders, board of directors, and officers as well as external forces such as clients, creditors, suppliers, competitors, and government regulations. In particular, the stockholders elect a board of directors, who in turn hire officers or managers to operate the firm in a manner consistent with the goals, plans, and policies established and monitored by the board on behalf of the shareholders.
Individual versus Institutional Investors
To better understand the role that shareholders play in shaping a firm’s corporate governance, it is helpful to differentiate between the two broad classes of owners—individuals and institutions. Generally, individual investors own relatively small quantities of shares and as a result do not typically have sufficient means to directly influence a firm’s corporate governance.
In order to influence the firm, individual investors often find it necessary to act as a group by voting collectively on corporate matters. The most important corporate matter individual investors vote on is the election of the firm’s board of directors.
The corporate board’s first responsibility is to the shareholders. The board not only sets policies that specify ethical practices and provide for the protection of stakeholder interests, but it also monitors managerial decision making on behalf of investors.
Although they also benefit from the presence of the board of directors, institutional investors have advantages over individual investors when it comes to influencing the corporate governance of a firm. Institutional investors are investment professionals that are paid to manage and hold large quantities of securities on behalf of individuals, businesses, and governments.
Institutional investors include banks, insurance companies, mutual funds, and pension funds. Unlike individual investors, institutional investors often monitor and directly influence a firm’s corporate governance by exerting pressure on management to perform or communicating their concerns to the firm’s board.
These large investors can also threaten to exercise their voting rights or liquidate their holdings if the board does not respond positively to their concerns. Because individual and institutional investors share the same goal, individual investors benefit from the shareholder activism of institutional investors.
Government Regulation
Unlike the impact that clients, creditors, suppliers, or competitors can have on a particular firm’s corporate governance, government regulation generally shapes the corporate governance of all firms. During the past decade, corporate governance has received increased attention due to several high-profile corporate scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers.
The misdeeds derived from two main types of issues: (1) false disclosures in financial reporting and other material information releases and (2) undisclosed conflicts of interest between corporations and their analysts, auditors, and attorneys and between corporate directors, officers, and shareholders.
Asserting that an integral part of an effective corporate governance regime is provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the firm, in July 2002 the U.S. Congress passed the Sarbanes-Oxley Act of 2002 (commonly called SOX). Sarbanes-Oxley is intended to eliminate many of the disclosure and conflict of interest problems that can arise when corporate managers are not held personally accountable for their firm’s financial decisions and disclosures.
SOX accomplished the following: established an oversight board to monitor the accounting industry; tightened audit regulations and controls; toughened penalties against executives who commit corporate fraud; strengthened accounting disclosure requirements and ethical guidelines for corporate officers; established corporate board structure and membership guidelines; established guidelines with regard to analyst conflicts of interest; mandated instant disclosure of stock sales by corporate executives; and increased securities regulation authority and budgets for auditors and investigators.
Corporate governance refers to the rules, processes, and laws by which companies are operated, controlled, and regulated. It defines the rights and responsibilities of the corporate participants such as the shareholders, board of directors, officers and managers, and other stakeholders, as well as the rules and procedures for making corporate decisions.
A well-defined corporate governance structure is intended to benefit all corporate stakeholders by ensuring that the firm is run in a lawful and ethical fashion, in accordance with best practices, and subject to all corporate regulations.
A firm’s corporate governance is influenced by both internal factors such as the shareholders, board of directors, and officers as well as external forces such as clients, creditors, suppliers, competitors, and government regulations. In particular, the stockholders elect a board of directors, who in turn hire officers or managers to operate the firm in a manner consistent with the goals, plans, and policies established and monitored by the board on behalf of the shareholders.
Individual versus Institutional Investors
To better understand the role that shareholders play in shaping a firm’s corporate governance, it is helpful to differentiate between the two broad classes of owners—individuals and institutions. Generally, individual investors own relatively small quantities of shares and as a result do not typically have sufficient means to directly influence a firm’s corporate governance.
In order to influence the firm, individual investors often find it necessary to act as a group by voting collectively on corporate matters. The most important corporate matter individual investors vote on is the election of the firm’s board of directors.
The corporate board’s first responsibility is to the shareholders. The board not only sets policies that specify ethical practices and provide for the protection of stakeholder interests, but it also monitors managerial decision making on behalf of investors.
Although they also benefit from the presence of the board of directors, institutional investors have advantages over individual investors when it comes to influencing the corporate governance of a firm. Institutional investors are investment professionals that are paid to manage and hold large quantities of securities on behalf of individuals, businesses, and governments.
Institutional investors include banks, insurance companies, mutual funds, and pension funds. Unlike individual investors, institutional investors often monitor and directly influence a firm’s corporate governance by exerting pressure on management to perform or communicating their concerns to the firm’s board.
These large investors can also threaten to exercise their voting rights or liquidate their holdings if the board does not respond positively to their concerns. Because individual and institutional investors share the same goal, individual investors benefit from the shareholder activism of institutional investors.
Government Regulation
Unlike the impact that clients, creditors, suppliers, or competitors can have on a particular firm’s corporate governance, government regulation generally shapes the corporate governance of all firms. During the past decade, corporate governance has received increased attention due to several high-profile corporate scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers.
The misdeeds derived from two main types of issues: (1) false disclosures in financial reporting and other material information releases and (2) undisclosed conflicts of interest between corporations and their analysts, auditors, and attorneys and between corporate directors, officers, and shareholders.
Asserting that an integral part of an effective corporate governance regime is provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the firm, in July 2002 the U.S. Congress passed the Sarbanes-Oxley Act of 2002 (commonly called SOX). Sarbanes-Oxley is intended to eliminate many of the disclosure and conflict of interest problems that can arise when corporate managers are not held personally accountable for their firm’s financial decisions and disclosures.
SOX accomplished the following: established an oversight board to monitor the accounting industry; tightened audit regulations and controls; toughened penalties against executives who commit corporate fraud; strengthened accounting disclosure requirements and ethical guidelines for corporate officers; established corporate board structure and membership guidelines; established guidelines with regard to analyst conflicts of interest; mandated instant disclosure of stock sales by corporate executives; and increased securities regulation authority and budgets for auditors and investigators.
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