Corporate Governance and the Sarbanes-Oxley Act Flashcards

Flashcards reviewing the Enron scandal, corporate governance principles, key definitions, and provisions of the Sarbanes-Oxley Act.

How was Enron Corporation formed in 1985?

Through the merger of Houston Natural Gas and InterNorth of Nebraska.

Who were the three key Enron executives during its financial scandal?

Chief Executive Officer (CEO) Jeffrey Skilling, Chief Financial Officer (CFO) Andrew Fastow, and Board Chair Kenneth Lay.

How did Enron improperly use Special-Purpose Entities (SPEs)?

Enron created SPEs to conduct improper off-balance sheet accounting intended to hide massive losses and debts from the investing public.

Which independent audit committee directors received perks from Enron, including cash donations to MD Andersen Cancer Center?

John Mendelsohn and John Wakeham.

Who sent an anonymous letter to Kenneth Lay warning that Enron 'might implode in a wave of accounting scandals'?

Sherron Watkins, Enron's Vice President for Corporate Development.

What third quarter 2001 financial losses and equity adjustments were reported by Enron?

A loss of $618 million and a one-time adjustment decreasing shareholders' equity by $1.2 billion.

How much did CFO Andrew Fastow personally earn in management fees from deals with off-balance sheet partnerships?

He personally earned $30 million dollars.

Which two white knight companies tentatively agreed to buy Enron for $8 billion before withdrawing their agreement?

Dynergy and ChevronTexacoCorp.

What did Enron's stock price drop to prior to filing for bankruptcy?

It plummeted to $0.40 per share.

What is the definition of Accounting Shenanigans?

Accounting schemes that distort amounts and disclosures in the financial statements in order to hide financial problems and/or to paint a brighter picture of economic performance.

What is an Agency Problem in corporate governance?

A situation that exists when the 'agents' ( corporate managers) use their authority for their own benefit and not for the benefit of the 'principal' (shareholders).

How is the Debt Ratio computed?

Total liabilities divided by total assets.

How does the Organisation for Economic Co-operation and Development (OECD) define Corporate Governance?

The system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal, and social obligations toward their stakeholders.

What is the primary operational distinction between Governance and Management?

Management deals with 'running the business' day-to-day, whereas corporate governance deals with 'making sure that the business is being run properly.'

What is the key difference between Stockholder Theory and Stakeholder Theory?

Stockholder theory suggests that the corporation exists solely for the benefit of shareholders, whereas stakeholder theory states that it exists for the benefit of all stakeholders, including employees, creditors, suppliers, government, and society.

How many non-audit services are external auditors prohibited from performing for a corporate issuer under SOX?

Eight non-audit services (bookkeeping, information systems design/implementation, appraisal/valuation, actuarial, internal audit, management/HR, investment adviser, and legal services unrelated to audit).

What cooling-off period is mandated by SOX before audit team members can accept employment as CEO or CFO at an audit client?

A one-year period.

How often must audit engagement partners be rotated under the Sarbanes-Oxley Act?

Every five years.

Who must certify management's assessment of internal controls over financial reporting under SOX?

The CEO and CFO.

In what year was the Organisation for Economic Co-operation and Development (OECD) founded?

1961.