Accounting Shenanigans and Agency Problem
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Questions and Answers

What is the term used to describe accounting schemes that distort financial statements?

  • Window dressing
  • Corporate governance
  • Agency problem
  • Accounting shenanigans (correct)
  • Who are the 'principals' in a corporation?

  • Board of directors
  • Shareholders (correct)
  • Corporate managers
  • External auditors
  • What is the primary function of an audit committee?

  • Issuance of securities to the public
  • Oversight of financial reporting process (correct)
  • Management of energy derivatives
  • Selection of corporate managers
  • What is the debt ratio a measure of?

    <p>Financial soundness</p> Signup and view all the answers

    What type of financial instruments are traded on the Chicago Mercantile Exchange?

    <p>Energy derivatives</p> Signup and view all the answers

    What is the goal of enterprise risk management?

    <p>To manage risks to be within the entity's risk appetite</p> Signup and view all the answers

    What is the role of the board of directors in a corporation?

    <p>To conduct all business and control properties</p> Signup and view all the answers

    What is corporate governance?

    <p>A system of stewardship and control</p> Signup and view all the answers

    What is the primary responsibility of an executive director?

    <p>To manage the day-to-day operations of the organization</p> Signup and view all the answers

    What is the role of an external auditor?

    <p>To render a report or opinion on financial statements</p> Signup and view all the answers

    What is a characteristic of an independent director?

    <p>Being free from any business or other relationship that could interfere with judgment</p> Signup and view all the answers

    What is the purpose of internal control?

    <p>To provide reasonable assurance regarding the achievement of objectives</p> Signup and view all the answers

    What is the role of management in an organization?

    <p>To implement policies laid down by the board of directors</p> Signup and view all the answers

    What is off-balance sheet accounting?

    <p>The practice of not reflecting an asset and/or a liability on the financial statements</p> Signup and view all the answers

    What is the purpose of the OECD?

    <p>To stimulate economic growth through the formulation of policies</p> Signup and view all the answers

    What is a special-purpose entity?

    <p>An entity created for a narrow and specific business objective</p> Signup and view all the answers

    Study Notes

    Corporate Governance and Financial Concepts

    • Accounting shenanigans refer to accounting schemes that distort financial statements to hide financial problems or paint a brighter picture of economic performance, also known as "window dressing."

    Agency Problem

    • Occurs when corporate managers (agents) use their authority for personal benefit, rather than for the benefit of the shareholders (principals).

    CORPORATE GOVERNANCE ROLES

    • Audit Committee: composed of directors who oversee the financial reporting process, select external auditors, and receive audit findings.
    • Board of Directors: the governing body elected by shareholders that exercises corporate powers, conducts business, and controls properties.
    • Executive Director: a director with executive responsibility for day-to-day operations of part or whole of the organization.
    • Independent Director: a person independent of management and controlling shareholders, who exercises independent judgment.
    • Non-Executive Director: a director not involved in operational work of the corporation.

    FINANCIAL CONCEPTS

    • Debt Ratio: a measure of financial soundness, computed as total liabilities divided by total assets.
    • Energy Derivatives: complex financial instruments based on energy products (e.g., oil, natural gas, electricity), traded on formal exchanges like the Chicago Mercantile Exchange.
    • External Auditor: an independent accounting firm that provides a report or opinion on a company's financial statements.
    • Internal Control: a process designed to provide reasonable assurance regarding operational, reporting, and compliance objectives.
    • Off-Balance Sheet Accounting: not reflecting assets and/or liabilities on financial statements.
    • Special-Purpose Entity (SPE): an entity created for a narrow and specific business objective, such as obtaining finance.

    OTHER CONCEPTS

    • Corporate Governance: a system of stewardship and control that guides organizations in fulfilling their long-term obligations to stakeholders.
    • Corporate Issuer: a corporation that issues securities (e.g., stocks, bonds) to the public.
    • Enterprise Risk Management: a process to identify potential events, manage risks, and provide reasonable assurance regarding entity objectives.
    • Organisation for Economic Co-operation and Development (OECD): an inter-governmental entity promoting economic growth through policy formulation.
    • Publicly-Listed Company: a company whose shares are traded on a stock market (e.g., Philippine Stock Exchange).
    • Sarbanes-Oxley Act: a corporate governance regulation that strengthens corporate governance structures, regulates auditing, and assesses internal controls over financial reporting.

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    Description

    Quiz on accounting schemes that distort financial statements and the agency problem where corporate managers prioritize their own interests over the owners'.

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