Corporate Governance and Ethics

Part One Private Enterprise and Public Trust 1

Chapter 1. The Free Market System and Business 3

Introduction 3

The Free Enterprise System and Capital Markets 4

Public Trust and Investor Confidence 6

The Role and Responsibility of Business in Society 7

The Role of Financial Information in the Capital Markets 11

Introduction to Corporate Governance 16

Introduction to Business Ethics 20

Classroom Implications of this Book 22

Summary 23

Key Terms 24

Review Questions 24

Discussion Questions 25

Notes 26

Chapter 2. Corporate Governance 28

Introduction 28

Definition of Corporate Governance 29

Aspects of Corporate Governance 30

Corporate Governance Structure 34

Sources of Corporate Governance 44

Corporate Governance Reforms 45

Sarbanes-Oxley Act of 2002 46

Corporate Governance Rating 49

Corporate Governance Reporting 50

Global Convergence in Corporate Governance 54

Summary 56

Key Terms 57

Review Questions 58

Discussion Questions 58

Notes 59

Chapter 3. Introduction to Business Ethics 60

Introduction 60

Ethical Theories 61

Ethics in the Workplace 62

Business Ethics 64

Triangle of Business Ethics 66

Ethics Teaching in Business Schools 71

Professional Ethics 74

Reporting Business Ethics and Conduct 75

Financial Reporting Integrity 78

Summary 82

Key Terms 83

Review Questions 83

Discussion Questions 83

Notes 84

Part Two Roles and Responsibilities of Corporate Governance Participants 87

Chapter 4. Board of Directors’ Roles and Responsibilities 89

Introduction 89

Role of the Board of Directors 90

Fiduciary Duties of the Board of Directors 93

Board Committees 96

Board Models 98

Board Characteristics 100

Board Selection 107

Director Education and Evaluation 108

Board Accountability 108

Effective Corporate Boards 110

Director Liability 111

Summary 113

Key Terms 115

Review Questions 115

Discussion Questions 115

Notes 116

Chapter 5. Board Committee Roles and Responsibilities 117

Introduction 117

Relevance of Board Committees 118

Audit Committee 118

Compensation Committee 133

Corporate Governance Committee 139

Nominating Committee 142

Other Board Standing Committees 147

Summary 147

Key Terms 149

Review Questions 149

Discussion Questions 149

Notes 150

Chapter 6. Roles and Responsibilities of Management 152

Introduction 152

Management Responsibilities 153

Corporate Officers 155

Executive Compensation 159

Financial Reporting Requirements 161

Financial Reporting Challenges 164

Internal Control Reporting and Executive Certifications 176

Enterprise Risk Management 182

Tax Accounting 185

Summary 186

Key Terms 187

Review Questions 188

Discussion Questions 188

Notes 189

Chapter 7. Regulatory Bodies,Standard Setters, and Best Practices 191

Introduction 191

Regulations 192

The Sarbanes-Oxley Act of 2002 193

Securities and Exchange Commission 204

Public Company Accounting Oversight Board 208

Federal Sentencing Guidelines for Organizations 211

American Institute of Certified Public Accountants 211

Financial Accounting Standards Board 213

Government Accounting Standards Board 214

International Federation of Accountants 214

Committee of European Securities Regulators 215

State Influence on Corporate Governance 215

Corporate Governance and Courts 216

Corporate Governance and Self-Regulatory Organizations 216

Best Practices 219

Summary 222

Key Terms 223

Review Questions 224

Discussion Questions 224

Notes 224

Chapter 8. Internal Auditors’ Roles and Responsibilities 227

Introduction 227

Internal Auditing Function and Corporate Governance 228

Trend and Relevance of Internal Auditors 231

Authorities and Responsibilities of Internal Auditors 232

Internal Audit Outsourcing 236

Audit Committee Relationship with Internal Auditor 236

Internal Auditors’ Role in Internal Control 238

Institute of Internal Auditors 240

Determinants of Effective Internal Audit 243

Summary 247

Key Terms 248

Review Questions 248

Discussion Questions 249

Notes 250

Chapter 9. External Auditors’ Roles and Responsibilities 252

Introduction 252

External Auditing and Corporate Governance 253

External Auditor Responsibilities 255

Auditor Competency 256

Audit Failures and Audit Quality 257

Public Company Accounting Oversight Board 258

Audit Committee Oversight of External Auditors 267

Auditor Independence 273

Consolidation and Competition in Public Accounting Firms 276

Integrated Audit Approach 277

Audit Strategy 277

Audit of Defined Benefit Pensions 279

Auditor Liability Limitation Agreements 279

Summary 283

Key Terms 284

Review Questions 284

Discussion Questions 285

Notes 286

Chapter 10. Stakeholders’ Roles and Responsibilities 288

Introduction 288

Shareholders 289

Institutional Investors 295

Mutual Funds 298

Hedge Funds 300

Investor Activists 300

Employee Monitoring 300

Summary 303

Key Terms 304

Review Questions 304

Discussion Questions 304

Notes 305

Chapter 11. Roles and Responsibilities of Other Corporate Governance Participants 307

Introduction 307

Legal Counsel 308

Financial Advisors 312

Investment Banks 316

Summary 318

Key Terms 318

Review Questions 319

Discussion Questions 319

Notes 319

Part Three Contemporary Issues in Business Ethics and Corporate Governance 321

Chapter 12. Technology and Corporate Governance 323

Introduction 323

Information Technology 324

Cybercompany Model 325

Extensible Business Reporting Language 327

Continuous Auditing 333

Summary 336

Key Terms 337

Review Questions 337

Discussion Questions 338

Notes 338

Chapter 13. Corporate Governance in Private and Not-for-Profit Organizations 340

Introduction 340

Types of NPOs 341

Purpose and Role of NPOs 342

Public Trust in NPOs 343

Governance of NPOs 345

Governance Structure of NPOs 350

Oversight Function of NPOs 351

Internal Control in NPOs 356

Summary 357

Key Terms 358

Review Questions 358

Discussion Questions 358

Notes 359

Chapter 14. Corporate Governance in Transition 361

Introduction 361

Historical Perspective of Corporate Governance 362

Corporate Governance: A Global Perspective 362

Convergence in Corporate Governance 381

Corporate Governance in Multinational Corporations 390

Summary 391

Key Terms 392

Review Questions 392

Discussion Questions 392

Notes 392

Chapter 15. Emerging Issues in Corporate Governance 395

Introduction 395

Investor Confidence and Global Financial Markets 396

Accountability: The New Business Imperative 403

Social, Environmental, and Ethics Performance 403

Shareholder Challenging Issues 406

Challenges Facing Directors 409

SOX Compliance Challenges 413

Financial Reporting Challenges 414

Emerging Auditing Issues 425

Summary 429

Key Terms 430

Review Questions 430

Discussion Questions 431

Notes 431

Index 435