Corporate Governance & Ethical Behavior

• Trust and credibility are paramount where financial information is concerned.
• Auditing provides a mechanism for ensuring the accuracy and fairness of financial statements.
• External auditors help stakeholders trust the company's financial figures.
• Without auditing, uncertainty would prevail, hindering capital flow and economic growth.
• Auditing acts as an early warning system for financial irregularities.
• Identification of fraud and errors can prevent financial shocks and economic downturns.
• Public confidence in the financial system, is boosted through auditing practices
• Audited financial statements help investors gain trust to invest.
• Auditing bridges information gap between management and external stakeholders
• Corporate scandals have caused many companies to institute new policies to emphasize the importance of ethical behavior.
• Business schools have added ethics to their curriculum.
• American Institute of Certified Public Accountants have professional codes of ethics that its members must abide by.
• Ethical behavior in the workplace starts with setting the right tone, which is also known as the “tone at the top."
• Corporate governance inspires managers to report the truth.

Factors of corporate governance are:

• Reputation of the managers and the business.
• Threat of legal liability if the law is broken.
• Ethics, operating and reporting in a clear and truthful manner.
• Investors deal with companies with good reputations and ethical behavior.
• Ethical audit firms are sought by creditors, stakeholders employees, and customers
• Financial disasters in the past decades have had fraudulent financial data at the core of the problem, such as what happened at Enron and WorldCom.
• SEC requirements exist, such as auditing the Form 10K’s.
• Investors rely on published financial statements to make their decisions.
• "Independent auditor" or "external auditor" is an accounting firm that specializes in "public accounting".
• An audit is defined as an independent examination of an organization's financial information, internal controls, and operational procedures.
• Audits cover financial and operational aspects, encompassing processes, controls, and compliance with laws.
• Independence is vital to maintain objectivity and impartiality, conducted by professionals external to the being audited.
• Auditors perform detailed reviews, inspections, and tests to gather evidence to confirm information, fairness, and accuracy.
• Audits include operational aspects to identify areas for efficiency, effectiveness, and compliance.
• Audits serve as independent evaluations of an organization's financial statements, internal controls, and operational processes

Audit Objectives

• Auditors examine the financial statements prepared by management and issue an opinion.
• The outside opinion from auditors lends credibility to the financial statements.
• Auditors do not guarantee that the financial statements are correct to any degree.
• The aim of the audit is to provide assurance, giving stakeholders confidence to make decisions
• Auditors communicate findings and conclusions through an audit report.

Introduction to Assurance Services

• Beyond traditional audits, assurance services have become a vital component of modern business practices.
• Assurance Services enhance the quality and reliability of stakeholders decision making processes.
• These services are characterized by their impartiality and objectivity.

Examples of Assurance Services

• Financial Statement Audits are provided by Certified Public Accountants (CPA's)
• Audit means to conduct a thorough review of an entity's financial standing.
• Audited financial statements show the status of their operations to any interested party.
• The job of auditors is to express an opinion on the statements management has prepared
• The cover sheet of the financial statements is required to state weather the records are in accordance with accounting standards.
• Deloitte, Ernst & Young (E&Y), KPMG, and PricewaterhouseCoopers (PwC) are the Big Four accounting firms
• Internal Control Assessments evaluate the effectiveness of an organization's internal controls and must be designed and operating effectively.
• Internal auditors are employed by the company, they audit departments within the company and report to top management as well as the audit committee.
• Internal auditor’s are responsible to ensure that they comply with policies from the company and outside regulators ie SEC, IRS, FASB etc. ect.
• Cybersecurity Audits, evaluate a companies information security measures
• Sustainability Reporting, apply assurance environmental and social responsibility
• Agreed-Upon Procedures (AUP) Engagements, assessments based on specific agreed-upon procedures.
• Reviews on the entity's books and records provides reader assurance
• Compilations give the reader financial assistance from CPA without review
• Compliance Audits, assure that organizations adhere to relevant laws, regulations, and industry standards.
• The objective of an audit is to give an express opinion on an organizations financial statements
• Materiality deals with misstatements in financial statements
• Auditors ensure the financial statements comply with accounting standards and regulations to give fair representation.
• Auditors must maintain independence and objectivity throughout the audit process, not being influenced by the organization being audited.

Management's Responsibilities in Financial Statements

• Prepare and present the the organization’s financial statements.
• Maintain accurate accounting records, adopting appropriate accounting policies, and ensuring compliance with accounting standards and regulations.
• Accountable for the design and operation of internal controls to prevent and detect errors and fraud.

Auditor's Responsibilities

• Evaluate the financial statements prepared by management.
• Assess the fairness and accuracy of these statements.
• Evaluate the effectiveness of internal controls, identifying areas that may pose risks to the accuracy of financial reporting.

The Audit Opinion

• The audit opinion is the auditor's formal statement regarding the financial statements.
• The financial statements can:
  • Be unqualified meaning the financial statements are fairly presented.
  • Or be qualified meaning that there may be limitations in the audit
  • Or be an adverse opinion that may indicate significant issues in the financial statements.
  • Or a disclaimer, which means the auditor cant formulate an opinion on insufficient data.
• Audit risk is the risk auditors may fail to detect material misstatements in the financial statements.
• Fraud involves intentional misrepresentation, manipulation, or deception, often for financial gain.

Fraud Triangle

• Financial Need that must be resolved.
• Opportunity to complete transaction
• Rationalize the crime and feel entitled.
• Mistakes are easier to uncover than fraud, fraud is difficult to detect

Enron's Unethical Accounting

• Enron collapsed in 2001 due to size its greed, and its unethical use of power.
• Started out as a pipeline and became a major trading player in gas, water, and electricity.
• Management consistently relentless in finding markets to expand and influenced Washington to open new markets.
• Investors demanded continuous growth that became impossible to maintain so it required a huge debt load
• The company began concealing debt by creating offshore partnerships and transferred the debt to keep the debt of the Enron balance sheet.
• Arthur Anderson, the external audit firm that was responsible for Enron, went down with the company for not reporting the wrong doings.
• The executives were secretly selling Enron Stock when the company collapsing

SEC's Response to Enron

• SEC has the job to protect investing public since independent auditors were entwined in the client affairs
• Sarbanes-Oxley Act, officially the “Public Company Accounting Reform and Investor Protection Act of 2002" for companies that have equity that is registered in the Securities Exchange Act of 1934.

Key changes with Sarbanes-Oxley

• Corporate Governance, securities analysis, and performance of audit work.
• Must encourage management ethical operation and to adhere to “best practices.
• Sarbanes-Oxley requires companies to have an audit committee to work with independent auditors.
• Requires the chief executive officer (CEO) and the chief financial officer (CFO) to certify that its financial statements are correct
• Requires management to sign as to the effectiveness of the company's internal controls.
• Federal Crime to pressure an auditor to issue misleading financial statements.
• Has a "whistle blower" protection for employees to encourage wrongdoing

More requirements for Auditors in Sarbanes Oxley

• Cannot provide a myriad of services for services the audit
• Can only provide tax services
• Auditors retain their work papers, at least 7 years.
• There must be second partner review.
• Lead auditors must rotate every 5 years.
• The “cooling-off period” is a one year wait before the lead auditor on an account can go to work in one of their client's key positions, such CEO and CFO.
• Created the “Public Company Accounting Oversight Board (PCAOB)” to regulate and disciplinary firms.
• Companies internal controls are all safeguarded to protect assets and encourage employee adherence.

Five Elements of Internal Controls

• Control Environmental, employee integrity, ethics, and competence and
• Risk Assessment, entity must realize the risks it face and take steps to control.
• Control Activities, procedures must be established to implement management's policies.
• Communicated to the employees impacted, information and communication, and
• Continual Monitoring, making sure controls adhered to the company's assets.

Explore the principles of corporate governance, the impact of ethical behavior, and the role of credible financial statements. Understand how legal liability, ethical conduct, and a company's reputation contribute to strong governance. Learn about the responsibilities of management and auditors in ensuring financial transparency.