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Forms of Executive Compensation
- 1. Base Salary and Bonuses
- 2. Stock Options.
- 3. Stock grants.
- 4. Executive perquisites (perks).
The best forms of executive compensation.
Include a combination of fixed compensation and incentive compensation that is related to long-term stock price.
Internal Monitoring Devices of mangement behavior.
- 1. Board of directors.
- 2. Internal auditors.
External Monitoring Devices of mangement behavior.
- 1. External auditors.
- 2. Analysts.
- 3. Credit angencies.
- 4. Attorneys.
- 5. SEC.
- 6. IRS.
Board of directors responsibilities.
- 1. Hiring and firing top management.
- 2. Voting on major operating and financial proposals.
- 3. Providing advice to management.
- 4. Ensuring accurate financial reporting by the corporation.
Board of directors committees.
- 1. Nominating/corporate governance committee.
- 2. Compensation committee.
- 3. Audit committee.
Nominating/corporate governance committee responsibilities.
- 1. Oversees board organization.
- 2. Determines director qualifications and training.
- 3. Develops corporate governance principles.
- 4. Oversees CEO succession.
SOX definition of Audit Committee.
A committee established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and fincial reporting process of the issuer; and audits of the financial statements of the issuer.
SOX's characteristics of the Audit Committee.
- 1. At least one member should be a "financial expert".
- 2. Should appoint, determine compensation of, and ovesee the work of the external auditor.
- 3. External auditor must report directly to the committee.
- 4. Internal auditor should have direct access to the committee.
- 5. Establish procedures to receive and treat complaints regarding accounting or auditing matters.
- 6. Officers are responsible of effective internal control.
Compensation committee responsibilities.
- 1. Reviews and approves CEO compensation based on performance goals.
- 2. Makes recommendations to the board with respect to incentive and equity-based compensation plans.
- 3. Attempts to align incentives with shareholder objectives and risk appetite.
What is COSO?
Committee of Sponsoring Organizations.
5 components of COSO Internal Control.
- 1. Control Environment.
- 2. Risk Assessment.
- 3. Control Activities.
- 4. Information and communication.
- 5. Monitoring.
Factors of Control Environment (CHOPPER)
- 1. Commitment to Competence.
- 2. Human resource policies and procedures.
- 3. Organizational structure.
- 4. Philosphy and Operating style of Management.
- 5. Participation of board of directors or audit committee.
- 5. Ethical and integrity values.
- 6. Responsibility and authority assignment.
Control Activities components. (PIPS)
- 1. Performance reviews.
- 2. Information processing.
- 3. Physical controls.
- 4. Segregation of Duties.
Segregation duties components. (ARCCs)
- 1. Authorizing.
- 2. Recording.
- 3. Custody of assets.
- 4. Comparisons (recons)
Components of COSO-ERM
- 1. Internal environment.
- 2. Objective Setting.
- 3. Event identification.
- 4. Risk Assessment.
- 5. Risk Response.
- 6. Control activities.
- 7. Information and communication.
- 8. Monitoring
4 types of risk responses.
- 1. Avoidance.
- 2. Reduction.
- 3. Sharing.
- 4. Acceptance.
Limitations of Enterprise Risk Management.
- 1. Risk relates to the future which is uncertain.
- 2. ERM provides information about risks of achiving objectives, but cannot provide reasonable assurance that objectives will be achieved.
- 3. ERM cannot eliminate all risks.
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