SUMMARY OF STUDY OBJECTIVES

An overview of corporate governance. Corporate governance is the body of policies and procedures in place to make sure that all of the corporation's employees and leaders are held accountable for their actions on the job. Its purpose is to ensure the efficient use of the company's resources so as to protect the economic wealth of the shareholders and the overall health of the corporation. An effective system of corporate governance depends on the tone at the top.

Participants in the corporate governance process. Many stakeholders are important to the corporate governance process. Internal stakeholders consist of shareholders, the board of directors and its audit committee, and all of the company's layers of personnel, including managers, supervisors, staff members, and internal auditors. External stakeholders consist of external auditors, regulators, investors, creditors, customers, suppliers, and the overall business community in which the company operates.

The functions within the corporate governance process. There are four primary functions of the corporate governance process: management oversight, internal controls and compliance, financial stewardship, and ethical conduct. Management oversight involves the various positions of internal and external stakeholders monitoring the responsibilities of others under their direction. Internal control and compliance involve safeguarding corporate assets and establishing accurate financial reports in an effort to maintain compliance with accounting principles and other regulations. Financial stewardship is the overall responsibility for protecting the financial interest of the company's shareholders. Ethical conduct is the foundation of the corporate governance system, as each of the other functions depends on the honest and conscientious efforts of the people involved.

The history of corporate governance. Corporate governance first came to light in the 1930s with the creation of the Securities and Exchange Commission and in reaction to the accounting problems connected with the market crash of 1929 and the Great Depression. Over the years, the concept has evolved as the business world has shifted focus from materiality to earnings pressures and, most recently, to the requirements of the Sarbanes–Oxley Act.

The Sarbanes–Oxley Act of 2002. This federal law was enacted in an effort to improve financial reporting and to reinforce the importance of corporate ethics. The most significant provisions of the Act include the establishment of the Public Company Accounting Oversight Board (PCAOB) to monitor and discipline public accountants and audit committees, increased information requirements for financial reporting purposes with stiff penalties for noncompliance, requirements for management to certify the financial statements and internal controls of the company, and increased responsibilities for auditors to report on the effectiveness of their client's internal controls and restrict the types of nonaudit services they perform for audit clients.

The impact of the Sarbanes–Oxley Act on corporate governance. The Act has resulted in widespread change in the corporate environment, as it involves all of the participants and functions within the corporate governance process. Much attention is placed on the roles of corporate leaders and their diligent involvement in the company's financial information. Many responsibilities of management and the board of directors have grown in importance, especially with respect to oversight, maintenance of effective internal controls to support compliance, and increased focus on financial stewardship and ethical conduct. Gone are the days when corporate managers and boards could perform solely the task of strategic decision making; the Act requires these corporate leaders to be well versed in many details of the company's financial systems.

The importance of corporate governance in the study of accounting information systems. The Sarbanes–Oxley Act heightens the business value of financial information, as it requires more financial information and faster financial reporting. There is much attention on the roles of the accountants and IT personnel who provide financial information for the company. In addition, it is increasingly important that this data be readily accessible to the auditors and members of corporate management who are responsible for certifying it.

Ethics and corporate governance. Internal stakeholders may sometimes have difficult ethical choices to make when their personal interests conflict with the interests of shareholders. Corporate governance must provide the structure to make sure that a system of financial stewardship is maintained, even when times get tough.

KEY TERMS