Corporate Governance Overview
Hi. Welcome to this online BEC CPA Exam Review course. My name is Jennifer Louis, CPA and I'm going to be walking you through corporate governance. A few tips before we start. One tip is to make sure that you have your viewer's guide with you so that you can follow along as we discuss the topics. It's important for you to use it as an outline, but to make sure that you keep your own notes of things that you hear that struck a chord with you and things that you want to make sure that you remember.
You want to treat this course like you're taking a live CPA Review course, which means at the end you want to make sure that after you've listened to the video and you've gone through and taking your notes, that you take a few moments to go through and review the outline and the notes that you took prior to moving on to the next topic.
The first thing that we're going to talk about in this BEC CPA Review lecture is to go through an overview of what corporate governance is. Now, corporate governance is going to be the manner in which an entity is managed and governed. Now, who is involved in this process? It's going to vary from entity to entity. Sometimes it's just management.
Other times it's the management and other personnel that are appropriate to assist management within the organization. And it also may include those charged with governance, which may include the board of directors. Not all entities have boards of directors. Some of them will just have an executive committee management committee or an owner of the business that helps govern the organization.
But the ultimate goal is to make sure that there are some. Person or persons that operate to the benefit of the organization to make sure that they're running the operations effectively and efficiently. That there are controls over reliable financial reporting, that there are controls over governing the organization as far as compliance with laws and regulations and contracts and grant agreements.
And then they also need to make sure that there's somebody that is involved in overseeing the strategic direction of the organization. When you think about things from an audit perspective, mostly the auditors are concerned about internal controls over financial reporting and internal controls over financial reporting are a process that's affected by the company's board of directors, management, and other personnel.
What is Corporate Governance?
So as we talked about what corporate governance is, governance could be something that includes all three of those different components or elements of corporate governance. Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of the financial statements.
On the BEC section of the CPA Exam, since we're dealing with financial statements, that's why generally auditors are interested in internal controls over financial reporting because they're wanting to make sure that there's reasonable assurance that the financial statements that they're giving opinions on are reliable. Those charged with governance is a unique term that has emerged in recent years, and those charged with governance was a term that's a little bit broader than the board of directors.
It encompasses the board of directors and an audit committee that you typically might see in some organizations where they have the nature, size or complexity that really needs there to be a formal governance structure. Other organizations, smaller organizations might just have an executive management committee that might be the person or persons that are charged with governance.
In this BEC CPA Review course, when we talk about those charter governance, it's really any appropriate body that's responsible for overseeing the strategic direction of the organization and the obligations that are related to accountability, including financial reporting. They may or may not. Include the responsibility for improve approving the entities, financial statements.
So as I mentioned, governance, when we talk about those charged with governance is going to vary from entity to entity, and it's going to be influenced by the size and the ownership characteristics. Some members of those charge of governance may or may not have management responsibilities. The members of governance may or may not be an owner-manager.
But they could include those. On the CPA Exam, if it's a smaller entity, say if there is only a sole business owner with no other ownership in the organization, then they're generally going to be that owner-manager may be the only person that's charged with governance. Whereas a larger organization that might be publicly traded would have a formal board of directors in a formal audit committee.
But it doesn't matter if you're a sole trustee of an organization or whether or not there's a complete board. Every organization, regardless of its nature, size and complexity, is going to have a person or persons that are responsible for governing that entity management. Are go are those that are responsible for achieving the objectives of the entity, and they're the ones that have direct responsibility and authority to establish the policies and make decisions.
About financial statements and financial reporting objectives. So they're the ones that will actually design and implement and maintain internal controls over financial reporting. And then those charged with governance would be the ones that would oversee management to make sure that they're comfortable with what is being designed and implemented as it relates to financial reporting.
So those charged with governance overseas management. And then management may oversee other personnel in the organization that is responsible for actually carrying out those financial reporting directors like processing payroll and recording, um, acquisitions that would show up in, uh, in property plant and equipment.
And so everything would have a hierarchy within the organization with those charged with governance or the board of directors sitting at the top of the organizational structure. So boards of directors may be the formal representation of those charged with governance. And often when you hear that there's a board of directors, it's a group of people that are elected or appointed to oversee the activities of a company or an organization.
Other terms that you might hear or see on your BEC CPA Exam related to boards of directors are going to be things like a board of trustees or a board of governors or a board of managers. Or it even could be referred to as an executive board. Any of those terms are very, are very similar in nature in referring to the elected or the appointed people that are assigned with the responsibility to jointly oversee the activities of the organization.
Now, what those activities specifically are will depend a little bit as well. It all depends on what the powers are, the duties of the responsibilities are that are. Delegated to this group by an authority outside of itself. So when we talk about that, we mean that there would be perhaps corporate bylaws that would have been established for a publicly-traded company that would say, here's what the board of directors is supposed to do.
And it would outline those responsibilities within the corporate bylaws. So typically as we're looking at the number of board members and how they are chosen and what their specific responsibilities are, it may include how many times a year that they're expected to meet and what types of reports that they generate as a result of these meetings.
Those are all going to be governed by the bylaws. As far as legal responsibilities for the board of directors, that's going to depend with the nature of the entities. So is it a publicly-traded organization? Is it a not for profit organization? Is it a college or a university? Each different type of entity will have some rules that it has to follow that converts on it by oftentimes.
Regulatory or legal type things that they have to follow, and then each jurisdiction and each different state than an organization and operates in. We'll also generally have some legal responsibilities. The board of directors when there is a formal board of directors. So often when we're thinking about responsibilities, if you have a board of directors that's more of a formalized governance structure, there often are bylaws that are the corporate bylaws, or there might be laws or regulations within the state that the organization operates in.
That gives responsibilities and accountability to the board of directors. But remember, not every organization needs to have a formal board. So depending on the nature of the organization, it might be that those charge of governance isn't a formal board of directors. It's just a management team, or it's just an owner of the business.
There's still would be responsibilities for that person or persons, but there's going to be less formalized, and it's not necessarily going to be something that's governed by laws or regulations outside of the entity itself. So the more than an entity has public accountability. Be it because it's a publicly traded organization or because they receive money through grants or they're for a not for profit organization or it's a college or university that also gets grant funding and operates perhaps within the confines of state rules, those types of organizations or.
Often going to have those boards of directors that are going to be appointed or they're going to be voted on by a larger membership for them to represent and act on behalf of the entity as a whole. So some organizations are required to have boards of directors, and that's one of the things you have to make sure that you're aware of with publicly traded organizations that are regulated by the sec and are governed by the Sarbanes Oxley act, those types of entities are required by statutory and regulatory bodies to have a board of directors.
A lot of times these public companies, when they have this board of directors, the board of directors is representing all the shareholders of the organization, but they don't necessarily have power directly in order for them to make a change. It's more than. Everybody in the, in the full, all the shits shareholders would have responsibility for submitting and getting a vote.
But oftentimes they have a proxy vote, and so they send in for major changes. They send in what they believe their proxy vote should be on a particular issue. And then the board in essence though often does have voting memberships, and a lot of times the board. We'll have a voting block. They will have so many voting shares that a lot of times the boards for large public companies have what they call de facto power, which means while they don't have direct power and authority, they have de facto power because their voting block is so large that sometimes it's difficult to overcome decisions that they desire to make.
Even if you had other shareholders sending in their proxy votes as it relates to specific issues. Small private companies, on the other hand, generally have. A lot of times it's the same people that are involved in managing and running the business. That also may be the ones that are sitting on these boards and then or might be the ones that are assigned with these governance responsibilities.
And so sometimes there's no real division of power between the two. Oftentimes it's the management of the company that often sits on the board of directors. So a lot of times for these smaller private companies that don't have this outside regulatory requirement to have a board of directors still has a governance structure that is similar to a board, but they often will use the term those charged with governance as opposed to establishing a formal board of directors.
So on behalf of Bisk CPA Review BEC, I'd like to thank you for listening to this BEC lecture on general corporate governance oversight responsibility section on understanding the definitions. And what I'd like you to ask you to do is to go back and read the notes that you took and look at the outline and make sure that you're comfortable with the foundational definitions of some of these areas that we discussed before you move on to the next section.
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