Issuu on Google+

CO

PY

AL

MA

TE

RI

Components of Enterprise Risk Management, 8 Consumer Demand and Utility, 56 Contingency Planning, 39 Control Totals, 45 Controls in an IT Environment, 37 Corporate Governance and Enterprise Risk Management, 1 Cost Classifications, 143 Cost Drivers, 141 Cost Estimation, 140 Cost Measurement, 140 Cost of Capital, 121 Cost of Quality, 138 Costing Methods, 145 Cost-Push Inflation, 69 Cost-Volume-Profit Analysis, 166 Data Entry Devices, 26 Data Structure, 28 Debt Covenants, 112 Debt Utilization Ratios, 133 Demand Curve, 50

D TE

RI

GH

Accounting for By-Products, 170 Accounting Process In An IT Environment, 32 Accounting Rate of Return, 96 Activity Based Costing, 148 Aggregate demand and supply, 66 Application Controls, 40 Asset Utilization Ratios, 131 Attributes of Paper vs Electronic Systems, 13 Average Returns, 82 Balance of Payments, 78 Balanced Scorecard, 126 Benchmarking, 135 Benefits of IT, 14 Bond Interest Rates, 115 Budgeting Material Purchases & Payments, 159 Business Cycle, 71 Calculating Total Costs, 140 Capital Budgeting, 94 Capital Structure, 111 Cash Management, 103 Common Stock, 118

Index

176


Demand Curve Shifts, 51 Demand-Pull Inflation, 68 Derivatives, 89 Economic Concepts, 50 Edit Tests, 42 Effects of Price Inflation, 66 Elasticity of Demand, 54, 55 Electronic Commerce, 17 Expected Returns, 80, 81 Factors Causing a Supply Curve Shift, 59 Financial Management, 101 Flexible Budgeting, 156 Flowcharts, 49 Foreign Exchange Rates, 79 General Controls, 38 Government Involvement in the Economy, 75 Graphical Approach to Breakeven, 167 Hardware, 23 High-Low Method, 141 Incentives to Defeat Agency Problem, 1 Indicators of Business Cycles, 72 Information Technology, 13

Input Controls, 41 Interest Rates, 74 Internal Controls, 5 Internal Rate of Return, 97 International Trade, 76 Internet, 20 Inventory Management, 106 Job Order Costing, 150 Joint Product Costing, 168 Joint Products & By-Products, 168 Just-In-Time (JIT) Purchasing, 108, 109 Leverage, 120 Limitations of Enterprise Risk Management, 12 Liquidity Ratios, 132 Loan Risks, 87 Long-Run Costs of Production, 62, 63 Long-Term Debt, 111 Manufacturing Overhead, 146, 147 Market Equilibrium, 60 Market Ratios, 134 Marketable Securities, 104 Master & Static Budgets, 157

Index

177


Measurement Frameworks, 125 Measures of Economic Activity, 64, 65 Measuring Price Inflation, 67 Mergers, 123 Multiplier Effect, 70 Negative Demand Curve Shift, 53 Net Present Value, 98 Networks, 19 Networks and Control Risk, 22 Obstacles to Free Trade, 77 Operations in an IT Function, 35 Organization in a Segregated Department, 34 Organization of an IT Environment, 33 Other Technical Services, 36 Output Controls, 44 Payback Method, 95 Performance Measures, 125 Planning, Control, & Analysis, 156 Portfolio Risk, 85, 86 Positive Demand Curve Shift, 52 Preferred Stock, 119 Preparing a Master Budget, 158

Probability Analysis, 99 Process Costing, 151 Processing Controls, 43 Product & Service Pricing, 171 Profitability Ratios, 130 Provisions Affecting Repayment of Bonds, 114 Quality Control, 136, 137 Receivables Management, 110 Regression Analysis, 142 Relevant Costing, 100 Reorder Point & Safety Stock, 107 Responsibility Accounting, 163 Risk Management, 80 Risks Associated with Derivatives, 90 Risks of E-Commerce, 18 Risks of IT, 15 Secured and Unsecured Bonds, 113 Short-Run Costs of Production, 61 Size and Power of Computers, 24 Software, 27 Special Analyses for Decision Making, 99 Spoilage & Scrap, 144

Index

178


Standard Costing, 160 Standard Deviation, 83 Storage Devices, 25 Supply Curve, 57 Supply Curve Shifts, 58 Time Value of Money, 93 Transfer Pricing, 164 Types of Computer Systems, 16 Unemployment, 73

Use of Microcomputers, 46 Using Derivatives as Hedges, 91 Value-Based Management, 127 Valuing Derivatives, 92 Variable & Absorption Costing, 165 Variations on Bond Interest, 116, 117 Working Capital Management, 102 World Wide Web, 21 Yield Curve, 88

Index

179


AL TE

RI

Contents

CO

PY

RI

GH

TE

D

MA

Preface About the Author Corporate Governance, Internal Control, and Enterprise Risk Management Information Technology Economics, Strategy, and Globalization Financial Risk Management and Capital Budgeting Financial Management Performance Measures Cost Measurement Planning, Control, and Analysis Index

vii ix 1 13 50 80 101 125 140 156 176


AL

TE

RI

Corporate Governance and Enterprise Risk Management

D

Owners separate from management Agency problem: Will managers act in owners’ interest?

TE

• •

MA

Corporate Governance: Establish Incentives and Monitoring

Incentives to defeat agency problem Base salary and profit: usually based on accounting measure

RI

May lead to earnings manipulation or taking excessive risk

PY

CO

GH

Forms of Executive Compensation

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

1


Incentives to defeat agency problem (continued) •

Stock options: align shareholders’ and managers’ interest in increasing share prices • •

Differences in timing horizons (management short-term?) Underwater options provide no incentive

Restricted stock: force managers to think long-term

Monitoring Devices •

Boards of directors • •

Independent nominating/corporate governance committee Independent audit committee (AC) under Sarbanes-Oxley (SOX) • • •

At least one financial expert External auditors must report directly to AC AC appoints, determines compensation, and oversees external auditor

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

2


Incentives to defeat agency problem (continued) •

Stock exchange rules • Majority independent directors • Provide information to investors as to who is independent • Have and make available code of conduct • Have an independent AC (required by SOX) • Have an independent compensation committee (required by Dodd-Frank) • Clawback rules that require executives to pay back incentive compensation when there is an accounting restatement (required by Dodd-Frank) • Nonbinding shareholder votes on executive compensation and golden parachutes (required by Dodd-Frank)

Internal auditors • Provide assurance on risk management and internal control • Should report at least indirectly to AC

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

3


Incentives to defeat agency problem (continued) • • •

Independent and competent Chief IC officer report directly to CEO Should adhere to Institute of Internal Auditors (IIA) professional and ethical standards

External auditors • Help assure users that financials are accurate and not fraudulent • Must attest to management’s assessment of effective internal control as required by SOX

SEC and SOX • CEO and CFO must certify accuracy and truthfulness with criminal penalties • Fraud in sale or purchase of securities punishable by fine and/or prison • Destruction or other damage to documentation to hinder investigation punishable by fine and/or prison • Retaliation on “whistle-blowers” punishable by fine and/or prison Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

4


Internal Controls COSO: Internal Control Integrated Framework 1. Control environment a. Integrity and ethical values (tone at the top) b. Competence c. Effective BOD or AC d. Management philosophy operating style e. Effective organizational structure f. Clear assignment of authority and responsibility g. Effective human resource policies (e.g., training)

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

5


Internal Controls (continued) 2. Control activities a. Performance reviews b. Segregation of duties, IT controls c. Physical controls (e.g. over inventory) 3. Information and communication a. Employees understand role and responsibilities b. Capture information on a timely basis 4. Monitoring of controls: Are they working? a. b. c. d.

Ongoing and separate evaluations Evaluators monitor controls Evaluators should be objective and competent Monitoring may be considered as consisting of the following sequence of activities (monitoring-for change control continuum): Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

6


Internal Controls (continued) 1) Control baseline—establishing a starting point that includes a supported understanding of the existing internal control system. 2) Change identification—identifying through monitoring changes in internal control that are either necessary because of changes in the operating environment or have already taken place. 3) Change management—evaluating the design and implementation of the changes, and establishing a new baseline. 4) Control revalidation/update—periodically revalidating control operation when no known changes have occurred.

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

7


Enterprise Risk Management: Eight Components 1. Internal environment (tone of the organization) a. b. c. d.

Effective board Ethical management Risk appetite: How much risk is organization willing to accept to achieve a goal? Risk tolerance: how far above or below meeting objective is allowable?

2. Objective setting a. Well-defined mission b. Process to set objectives that align with goals

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

8


Enterprise Risk Management: Eight Components (continued) 3. Event identification a. Internal 1) Loss of key personnel 2) Damage to infrastructure (e.g., IS crash) 3) Key product/process becomes obsolete b. External 1) Establish “Trigger points” (e.g., competition increases market share above x amount) 2) Process to assess demographic and economic changes c. Black swan analysis: Evaluate negative events that were unforeseen to determine why

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

9


Enterprise Risk Management: Eight Components (continued) 4. Risk assessment: what are the risks? a. Assess impact and probability b. Inherent risk: what if management does nothing in response to identified risk? c. Residual risk: residual after management’s response 5. Risk responses a. Avoidance b. Reduction c. Sharing d. Acceptance 6. Control activities: policies and procedures to insure that risk responses are implemented

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

10


Enterprise Risk Management: Eight Components (continued) 7. Information and communication throughout organization a. Organization’s objectives b. Risk appetite and tolerance c. Role of ERM in managing risk 8. Monitoring: Effective process to oversee ERM

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

11


Enterprise Risk Management: Limitations 1. The future is uncertain 2. No absolute assurances a. b. c. d.

Human failure System breakdown Collusion across ERM Management override

Focus on

Corporate Governance, Internal Control, and Enterprise Risk Management – Module 40

12


Wiley CPA Focus Notes BEC