Corporate Governance

1. BOD
a. No individual authority (only as a group)
b. Primary Role Safeguard company assets & maximize shareholder returns
c. Declare dividends
d. Fiduciary Duty act in the best interest of the company (not liable if good faith)
e. Liable for unlawful distributions company cant pay debts due to distribution
f. Duty of Loyalty cant compete (cant be on both Coke & Pepsi boards)
g. Corporate Opportunity cant steal an opportunity from the company - disclose
h. Limitation on Directory Liability acting in bad faith or unethically
i. Supervise officers make sure they are acting in the best interest of the company
2. Officers
a. BOD Selects Officers
b. Authority Actual (oral or written instruction) or Apparent (title) Corp is liable
c. Fiduciary Duty same as board
d. May serve as Directors But a majority of the BOD should be independent
e. Not required to be a shareholder
3. SOX (2002) profound effect on financial reporting requirements by expanding dislosures
a. Corporate Responsibility
i. Audit Committee
1. Selects CPA firm, resolves disputes between CPA and Mgmt
2. Must be on the board, but should not be an employee of the company
3. Must establish a procedure for complaints (confidentiality)
ii. CEO/CFO
1. Sign off that they:
a. Reviewed Reports
b. Contain no untrue statements/facts
c. Assumed responsibility for internal controls
d. Disclosures to the Auditor and Audit Committee
i. No significant deficiencies in internal control
ii. Any Fraud
2. No improper influence on the conduct of the audit
3. Forfeiture of bonus and profits pay for restatement
a. Any bonus or incentives must be repaid
b. Any gains on sale of company stock in 12 month period
b. Enhanced Financial Disclosures Internal controls & audit committee
i. Periodic Reports (10K, 10Q) Intended to ensure the application of GAAP
1. All material correcting adjustments identified by the auditor
2. All off balance sheet financing transactions (Operating Lease, Law Suit,
related parties
3. Special purpose entities
ii. Conflict of Interest - No making personal loans to directors or officers
iii. Related Party transactions
1. Any person holding 10% of stock
iv. Section 404 (management assessment of internal controls) report
containing:
1. Report must management is responsible for establishing, maintaining
controls
2. Management assesses internal controls
3. Auditor attest (opinion) to managements assessment of internal
controls
v. Code of ethics Tone at the top must be disclosed. If no code reason
must be disclosed
vi. Disclosure of Audit Committee Financial Expert

1. Knowledge of GAAP, Experience in the prep of F/S, Experience

w/internal controls
vii. Enhanced Review of Disclosures (by SEC)
1. Dont audit everyone, look for flags
2. Issued previous restatements, volatility in the stock price, large market
cap, odd P/E, material to the economy
c. Fraud
4. COSO Framework
a. ORC 3 Objectives of Internal Control
i. Operational effectiveness and efficiency of an entitys operations
ii. Reporting reliability, timeliness, and transparency of reporting
iii. Compliance ensuring the entity is adhering to applicable laws and regulations
b. CRIME components needed to achieve the 3 objectives of Internal Control
i. Control Environment Tone at the top, Ethics
1. EBOCA process, structure, standards provide the foundation for
internal control
a. Ethics
b. Board Independence
c. Organizational Structure
d. Competence hire, develop and retain competent employees
e. Accountability
ii. Risk Assessment F/S misstated or fraud
1. EAR
a. Event ID
b. Assess Risk
c. Respond to Risk
iii. Information & Communications Internal and external parties
1. FACT
a. Fair
b. Accurate
c. Complete
d. Timely
iv. Monitoring Effectiveness of internal controls, report deficiencies, testing
1. Assessing quality of internal controls over time
2. Frequency of testing is dictated by risk (cash easier to steal than
buildings)
3. Communicate, report, and correct deficiencies in a timely manner
v. Existing Control Activities policies & procedures in place to mitigate risk
1. Detect & prevent fraud segregation of duties
2. IT control
3. Policies & procedures put into action and followed
c. Framework reasonable assurance that the entitys objectives will be achieved
i. Present included by design
ii. Functioning operating as designed
d. Ineffective Internal Control
i. If a major deficiency is identified, the entity may not state that it has met the
requirements for an effective internal control system.
e. Limitations
i. No Guarantees reasonable assurance
ii. Inherent limitations human failure, faulty judgement, external events,
circumvention, management override
5. Enterprise Risk Management Strategy balance of risk & return (COSO 2004)
a. Introduction
i. Align Risk Appetite & Strategy
ii. Enhance Risk Response

iii. Reduce Operating Surprises and Losses event identifications

iv. Cross Enterprise Risks common risks
v. Seizing Opportunities better capitalize on opportunities
vi. Improving Deployment of Capital ROI
b. SORC (S + ORC)
i. Strategy
ii. Operations
iii. Reporting
iv. Compliance
c. IS EAR AIM
i. Internal Environment (CRIME) Tone at the Top
1. EBOCA + HR
a. Ethics
b. Board Independence
c. Organizational Structure
d. Competence
e. Accountability
f. Human Resources Hire, train the most qualified people
g. Risk Appetite Aggressive or Conservative
ii. Setting Objectives (SORC)
1. Strategy mission of the company
2. Operations - profitability
3. Reporting - FACT
4. Compliance all laws and regulations
iii. Event Identification (CRIME) Internal & External Risks
1. Negative (preventative) & Positive (opportunity)
2. Economic, natural, social, technology
iv. Assessment of Risk (CRIME)
1. Inherent management takes no action
2. Residual left over after management takes action
3. Probablity
a. Benchmarking
b. Probabilistic Statistics, historic
c. Non Probabilistic Opinions, outcomes of lawsuit
4. Severity
v. Risk Response(CRIME) Entity Wide Risk (not by product/unit)
1. Avoidance discontinue an operation
2. Reduction Mitigate Risk Invest in study
3. Sharing Transfer Risk buy insurance, hedging
4. Acceptance Take no action, not cost effective
vi. Control Activities (Existing) (CRIME)
1. Policies & Procedures
2. Variance Analysis actual vs benchmark
3. Performance Reporting
4. Physical Controls Safeguarding assets
5. Performance Indicators Red Flags Ratio Analysis
6. Segregation of Duties
vii. Information & Communication (CRIME)
1. Fully integrated with Operations
2. Timeliness
3. Information Quality (FACT)
4. Communication
a. Internal communication with employees
b. External customer feedback / satisfaction
viii. Monitoring (CRIME)
1. Ongoing Monitoring dictated by risk

2. Separate Evaluations multiple checks and balances (Internal Audit)

3. Reporting Deficiencies through the normal chain of command (except
fraud)
d. Significance
i. Management and BOD have reasonable assurance
e. Limitations
i. Subject to human judgement, override controls, conspiring
6. Performance Management Accomplish Goals Motivate
a. Balanced Scorecard Converts strategic objectives into a set of performance
measures
i. Financial Measures Profit, ROI, Variance Analysis
ii. Non-Financial Measures
1. External Benchmark Variance / Efficiency ratio of output to input
a. Total Factor Productivity Ratio Material & Labor (output / Total
Costs)
b. Partial Productivity Ratio Materials OR Labor One input at a
time (output / one factor)
2. Internal Benchmark
a. Control Charts determine zero defects (all results within
acceptable range)
b. Pareto Diagram Histogram QC issues that are most frequent
c. Fishbone indicates the main categories of potential causes of the
defect
3. Effective Performance Measure Promote the achievement of goals
(motivate)
a. Relates to the goals of the org, reflects management key
activities, under control of the employee, understood by the
employee, used to evaluate and reward the employee, objective
and easily measured, used consistently.
4. Marketing Practices must consider the objectives of management
a. Establish value for a product
b. Transaction Marketing (lowest price), relationship marketing
(ongoing relationship, repeat business), database marketing
(target groups), e-marketing (internet), network marketing
(multi-level relationships & referrals)
5. Incentive compensation motivate, compensate, retain
a. Fixed Formula predictable payouts
b. Variable subjective not predictable various performance
criteria
c. Cooperative Stock Options based on companywide
performance
d. Competitive structures based on one team vs another team
7. Operations Management
a. Cost Object resource or activity that management wants to measure
i. A single cost object may have more than one way of measuring it. (tax vs
GAAP)
ii. Definitions
1. Prime Cost Direct Material + Direct Labor
2. Conversion Cost Direct Labor + Overhead Applied
3. Product Costs Materials, Labor, Overhead
iii. B/S assets inventory ( Materials, Work in Process, Finished Goods)
iv. I/S Expense upon Sale (COGS)
b. Product Cost not expensed until product is sold (inventoriable on B/S)
i. Direct materials, Direct Labor, Manufacturing Overhead
c. Period Costs not on balance sheet expensed in period incurred (selling & G&A)

d. Manufacturing Costs = Product Cost = Inventory

e. Non-Manufacturing Costs treated as period costs (Selling General &
Administrative)
f. Cost Accounting = Product Costing, Income determination, efficiency
g. Tracing cost to products, departments, geographic area
i. Direct Cost easily traced to the final product (labor & raw materials)
1. Materials includes Freight IN, not freight out + normal amount of scrap
2. Direct Labor labor for production + reasonable amount of downtown
(breaks, setup training)
ii. Indirect Cost
1. if incurred in the factory, its a product cost (factory rent, insurance,
indirect materials, utilities, depreciation) its manufacturing overhead
2. If incurred in the office period cost SG&A
iii. Indirect Materials were not specifically used (cleaning supplies, replacement
parts, consumables)
iv. Indirect Labor labor supporting the manufacturing process (supervisors, fork
lift driver, inspectors, etc. )
v. Other Indirect Costs In the Factory to count as product cost
1. Depreciation, rent, taxes, insurance, utilities only if it relates to the
factory.
h. Allocate overhead to cost drivers assign factory OH to individual products
i. Allocation Bases
1. Must have a strong relationship to the incurrence of costs (labor $ or
hours, machine hrs)
ii. Accounting for Overhead
1. Traditional costing (Total Mfg OH) allocated to a single cost pool
iii. Calculation
1. Calculated overhead Rate = budgeted overhead cost / estimated cost
driver
2. Applied overhead = Actual cost driver X overhead rate (step 1)
iv. Cost behavior - Linear
1. Fixed base component that cant be eliminated regardless of the
quantity
a. Rent, Insurance, Costs
2. Variable the more we produce, the higher the direct costs. No
product, no cost
a. Indirect Labor, Materials, Utilities, etc.
3. Mixed Fixed + variable costs
v. Relevant Range range for which assumptions of the cost driver are valid
vi. Cost Accumulation
1. Assign Costs to Products
a. Custom Job Order Costing
b. Mass Produced Process Costing
c. Back Flush Costing Product has no value until complete
vii. Cost of Goods Manufactured
1. WIP Inventory Beginning + Direct Material Used + Direct Labor
+ Overhead applied WIP Inventory Ending = COGS
a. If not given materials used calculate using: Beginning
Raw Materials + Purchases (incl freight in) = Materials
Available Ending Raw Materials = Materials Used
viii. Cost of Goods Sold
1. Beginning Finished Goods + Cost of Goods Manufactured =
Cost of Goods Available for Sale Ending Finished Goods =
Cost of Goods Sold
ix. Job order Costing

1. Relatively few units produced custom or unique

2. Cost through the process sequentially through the process
3. Manufacturing OH Actual greater than Applied Underapplied,
opposite Overapplied
x. Process Costing
1. Mass Produced every unit is the same
2. Production Report keeps track of the physical flow of units and costs
a. WIP beginning + transferred in transferred out WIP ending
3. Equivalent Units calculations is made by taking into account the
partially completed units and making them equivalent units
a. 10,000 units @ 75% complete = 7,500 equivalent units
4. Costing Issues Cost Flow Assumptions
a. FIFO (3 Step)
i. Beginning WIP (*) % TO be completed
XXX
ii. Units Completed () Beginning WIP
+ XXX
iii. Ending WIP (*) % Completed
+ XXX
iv. Equivalent Units
XXX
v. NOTE: Beginning units are multiplied by % TO
Complete, not % completed
b. Weighted Average - (2 Step)
i. Units Completed
XXX
ii. Ending WIP (*) % Completed + XXX
iii. Equivalent Units
XXX
5. Cost Per Equivalent Unit
a. Weighted Average
i. Beginning Cost (+) Current Cost
ii.
Equivalent Units
b. FIFO
i. Current Cost ONLY
ii.
Equivalent Units
6. Spoilage (aka: Shrinkage)
a. Normal Included in standard cost (inventory cost)
b. Abnormal Should not occur not in standard cost
i. Period Cost
8. Activity Based Costing (aka: transaction based costing)
a. Types
i. Volume Based Traditional Single cost pool, single overhead rate
1. Distorts the amount of cost assigned to a product line
ii. activity Based Uses multiple overhead rates by department (more OH used,
more assigned)
1. improvement to cost allocation accuracy
b. Introduction
i. Terminology
1. Cost Drivers causes the cost to change (automated = no labor cost)
a. Traditional (one)
b. Activity Based (multiple)
2. Activity Centers (Cost Pools)
a. Traditional (one for factory)
b. Activity Based (by department)
ii. Characteristics focused and detailed multiple cuases
1. Can be part of job order or process cost
iii. Cost/Benefit
1. Value - Direct Materials, Direct Labor
2. Non Value surplus inventory, extra warehousing
c. Advantages

i. If a product doesnt use a department, they should get little overhead from
that department
ii. Remove cost distortion
d. Service Costs
i. Direct Method total costs directly allocated to production without
recognizing that service departments may use services from other service
departments
ii. Step Down Method
1. More sophisticated approach, but not common
9. Joint Product Costing (Common Cost Allocation) costs related to more than one product
a. Joint Product main products
b. By-Product didnt set out to make the product
c. Split off point the point in production where the product can be recognized as an
individual product
i. Nike all shoes start off the same, but then some begin to be running vs
walking
d.