1 / 32

CHAPTER 1 Governance, Ethics, and Managerial Decision Making - PowerPoint PPT Presentation

  • Uploaded on
  • Presentation posted in: General

CHAPTER 1 Governance, Ethics, and Managerial Decision Making. © 2009 Cengage Learning. Introduction. Companies need strong corporate governance and sound ethical practices : Scandals cause the public to lose faith in the company

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

Download Presentation

CHAPTER 1 Governance, Ethics, and Managerial Decision Making

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript

CHAPTER 1 Governance, Ethics, and Managerial Decision Making

© 2009 Cengage Learning


Companies need strong corporate governance and sound ethical practices:

  • Scandals cause the public to lose faith in the company

  • Strong governance and sound ethics serve to make management more accountable to a range of stakeholders, including employees, investors, and customers

  • Both internal and external forces shape a company’s system of corporate governance and internal control

Corporate Governance

Embodied in the processes that companies use to promote:

  • Corporate fairness

  • Complete and accurate financial disclosures

  • Management accountability

Corporate Governance

  • Legal and regulatory requirements impact corporate governance

    • Board of Directors meets with auditors

    • Audit committee composed entirely of independent directors

  • No one set of corporate governance processes will fit all corporations

    • Tailored to fit size, complexity of operations, stakeholders, and unique business risks

  • Corporate Governance

    Key Concept

    Corporate governance systems are used by a company to promote fairness, complete and accurate financial reporting, and accountability.

    Internal Control

    Internal Control: The policies and procedures that

    provide reasonable assurance that a company’s

    goals and objectives will be achieved.

    Comprised of five elements:

    The control environment.

    Risk assessment

    Control activities

    Information and communication


    Key Concept

    Elements of Internal Control

    The Control Environment









    Control Environment

    • Owners’ and managements’ attitudes and general philosophy about Internal control and accountability

    • Organizational structure

    • Human resources policies

    • Commitment to competence

    • Oversight by company’s board of directors

    Risk Assessment

    • Steps a company takes to identify and evaluate risks that can adversely impact its ability to successfully conduct business

    • Assessment occurs at every level in the company

    • Once identified, management evaluates risks and takes steps to reduce risk to an acceptable level

    Control Activities

    • Segregation of Duties

    • Transaction Authorization

    • Safeguarding of Assets

    • Independent Reviews of Work

    Information and Communication

    • The accounting system used to initiate, record, process, and communicate the company’s performance

    • Technology has made computerized information systems widely available


    • A company’s periodic assessment of its internal controls

    • Should be performed by employees who don’t have responsibility for recordkeeping or internal control

    The Impact of Information Technology on Internal Control

    Risks in a Technology- Intensive Environment

    Threats by current employees

    Insider perpetrators

    Perpetrators intercepting

    credit card information,

    e-mail messages,

    company data

    Sabotage by former




    Fictitious customers

    posing as legitimate


    Unauthorized access to data



    The Importance of Ethics

    Business ethics

    The interaction of personal morals with the processes and objectives of business

    The Importance of Ethics

    • Integrity is the cornerstone of ethical business practices

    • Failure to build a business on integrity carries costs

    • May lower employee morale, reduce customer loyalty, harm a company’s standing in the community

    The Importance of Ethics

    Key Concept

    Establishing an ethical business environment encourages employees to act with integrity and conduct business in a manner that is just and fair to other stakeholders.

    Stakeholder Analysis

    • Stakeholders affect or are affected by the company

    • Stakeholder analysis alerts the company to various stakeholder issues including political, social, and ethical

    • Steps include:

      • Identify stakeholders

      • Understand stakeholders’ interests

      • Assess stakeholders power and influence

      • Assess social, legal, ethical, and economic responsibilities to stakeholders

      • Develop strategies to address demands of stakeholders

    Stakeholder Analysis

    Key Concept

    A stakeholder analysis approach is useful for identifying stakeholders and the social, legal, ethical, and economic responsibilities to those stakeholders.

    Ethics Programs

    Ethics programs include:

    • Written codes of ethics

    • Employee hotlines and ethics call centers

    • Training programs

    • Ethics offices

    Code of Ethics

    Three types of ethics codes

    • Code of conduct

      Lays out specific rules or standards of behavior

    • Credo or mission statement

      Describes the vision of a company and frequently asserts a commitment to key stakeholders

    • Corporate philosophy statement

      An broad outline of the company’s principles

    Code of Ethics

    Key Concept

    Three common types of codes of ethics include codes of conduct, mission statements, and corporate philosophy statements.

    Corporate Scandals

    Key Concept

    Fraud costs businesses and consumers billions of dollars each year. Accordingly, its prevention is of paramount importance.

    Sarbanes-Oxley Act of 2002

    • Management must provide certifications about internal controls.

    • Management must make its own assessment of the effectiveness of those internal controls.

    • Must have external auditor attest to those controls.

    • Criminal penalties for financial statement fraud increased.

    • Whistleblower protection.


    Defined as a

    Knowingly false representation of a material fact made by a party

    With the intent to deceive and induce another party to justifiably rely on the representation to his or her detriment

    Fraudulent Financial Reporting

    • Intentional misstatement of or omission of material, very significant information from a company’s financial statements

    • Generally requires management’s active involvement

    Management Fraud

    Management fraud is typically the result of pressure on management to report good operating results. Commonly involves:

    • Improper revenue recognition

    • Overstating assets

    • Understating liabilities

    Types of Fraud

    Key Concept

    There are two types of fraud: fraudulent financial reporting and misappropriation of assets.

    Management Fraud

    Key Concept

    Fraud involving upper management can be very difficult if not impossible to detect.

    Misappropriation of Assets

    • Involves the theft of a company’s assets.

    • Usually committed by lower-level employees.

    • Usually involves small amounts that do not

      impact the financial statements.

    • Usually involves cash, inventory, fixed assets.

      • Kiting

      • Lapping

      • Expense account abuse

    Causes of Fraud

    People engage in fraudulent activity as a result of an interaction of forces within an individual and the external environment.

    Combinations of pressure, opportunity, and attitude are likely to lead to fraud

    • The Fraud Triangle

    The Fraud Triangle

    Situational Pressures

    & Incentives


    Personal Characteristics

    & Attitudes


    Key Concept

    Three forces typically contribute to fraud: situational pressures and incentives, opportunities, and personal characteristics and attitudes.

  • Login