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Corporate Governance and Ethics

Corporate Governance and Ethics

Zabihollah Rezaee

ISBN: 978-0-470-47263-7

Dec 2008

464 pages



Colleges and universities play an important role in training competent and ethical future academic and business leaders. In today’s global business environment, with volatile worldwide capital markets and eroded investor confidence in corporate accountability, the demand for effective corporate governance and ethical conduct in ensuring reliable financial information is higher than before. This book is intended to develop an awareness and understanding of the main themes, perspectives, frameworks, concepts, and issues pertaining to corporate governance and business ethics from historical, global, institutional, commercial, best practices, and regulatory perspectives.

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Part One Private Enterprise and Public Trust.

Chapter 1. The Free Market System and Business.


Primary Objectives.

The Free Enterprise System and Capital Markets.

Public Trust and Investor Confidence.

The Role and Responsibility of Business in Society.

The First Tier: Investors.

The Second Tier: Creditors.

The Third Tier: Others.

The Role of Financial Information in the Capital Markets.

Introduction to Corporate Governance.

Corporate Culture and Integrity.

Corporate Accountability.

Introduction to Business Ethics.

Classroom Implications of this Book.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 2. Corporate Governance.


Primary Objectives.

Definition of Corporate Governance.

Aspects of Corporate Governance.

Shareholder Aspect.

Stakeholder Aspect.

Integrated Aspect.

Corporate Governance Structure.

Corporate Governance Principles.

Corporate Governance Functions.

Corporate Governance Mechanisms.

Sources of Corporate Governance.

Corporate Laws.

The Federal Securities Laws.

Listing Standards.

Best Practices.

Corporate Governance Reforms.

Sarbanes-Oxley Act of 2002.

Corporate Governance Rating.

Corporate Governance Reporting.

Global Convergence in Corporate Governance.

Differences between U.S. and European Models of Corporate Governance.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 3. Introduction to Business Ethics.


Primary Objectives.

Ethical Theories.

Ethics in the Workplace.

Business Ethics.

Corporate Culture.




Triangle of Business Ethics.

Ethics Sensitivity.

Ethics Incentives.

Ethical Behavior.

SEC Rules on Corporate Code of Ethics.

Listing Standards.

Ethics Teaching in Business Schools.

Ethics in Institutions of Higher Education.

Professional Ethics.

Reporting Business Ethics and Conduct.

Financial Reporting Integrity.

Organizational Drivers of Integrity in Reporting.


Key Terms.

Review Questions.

Discussion Questions.


Part Two Roles and Responsibilities of Corporate Governance Participants.

Chapter 4. Board of Directors' Roles and Responsibilities.


Primary Objectives.

Role of the Board of Directors.

Fiduciary Duties of the Board of Directors.

Duty of Due Care.

Duty of Loyalty.

Duty of Good Faith.

Duty to Promote Success.

Duty to Exercise Diligence, Independent Judgment, and Skill.

Duty to Avoid Conflicts of Interest.

Fiduciary Duties and Business Judgment Rules.

Board Committees.

Audit Committee.

Compensation Committee.

Governance Committee.

Nominating Committee.

Disclosure Committees.

Special Committee.

Board Models.

One-Tier Board Model.

Two-Tier Board Model.

Modern Board Model.

Board Characteristics.

Board Leadership.

CEO Duality.

Lead Director.

Board Composition.

Board Authority.



Board Independence.

Director Compensation.

Board Selection.

Director Education and Evaluation.

Board Accountability.

Effective Corporate Boards.

Director Liability.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 5. Board Committee Roles and Responsibilities.


Primary Objectives.

Relevance of Board Committees.

Audit Committee.

Definition of the Audit Committee.

Audit Committee Relationships with Other Corporate Governance Participants.

Historical Perspectives on Audit Committees.

Audit Committee Principles.

Audit Committee Composition.

Audit Committee Size.

Audit Committee Independence.

Member Qualifications.

Audit Committee Authority/Resources.

Audit Committee Responsibility.

Audit Committee Meetings.

Audit Committee Agenda.

Audit Committee Reporting.

Legal Liability of Audit Committees.

Evaluation of Audit Committee Effectiveness.

Audit Committee Evaluation of External Auditors.

Compensation Committee.



Proxy Statement Disclosure.

Compensation Committee Responsibilities.

Corporate Governance Committee.

Responsibilities of the Corporate Governance Committee.

Corporate Governance Reporting/Disclosures.

Nominating Committee.

Responsibilities of the Nominating Committee.

Selection, Nomination, and Election of New Directors.

Election of Directors.

Reelection of Incumbent Directors.

Succession Planning Process.

Nominating Committee Disclosures.

Other Board Standing Committees.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 6. Roles and Responsibilities of Management.


Primary Objectives.

Management Responsibilities.

Operating Process.

Financial Reporting Process.

Compliance Process.

Corporate Officers.

Chief Executive Officer.

Chief Financial Officer.

Corporate Development Officer.

Chief Risk Officer.

Chief Internal Control Officer.

Executive Compensation.

Components of Executive Compensation.

Executive Compensation Disclosure.

Financial Reporting Requirements.

Small Reporting Companies.

Financial Reporting Challenges.

Off Balance Sheet Arrangements Disclosures.

Aggregate Contractual Commitments.

Disclosure of Critical Accounting Policies.

Initial Adoption of Accounting Policies.

Disclosure of Changes in Existing Accounting Policies.

Acceleration of Periodic Report Filing Dates and Real-Time Disclosures.

Non-GAAP Financial Measures.

Voluntary Changes in Accounting Policies.

Accounting Pensions and Other Postemployment Benefits.

Principles-Based versus Rules-Based Accounting Standards.

Conceptual Framework for Financial Reporting.

Earnings Management.

Financial Restatements.

Convergence in Financial Reporting.

Internal Control Reporting and Executive Certifications.

Internal Control Over Financial Reporting.

Internal Control Evaluations.

Section 404 Costs.

Benefits of Section 404 Compliance.

Sustainable Section 404 Compliance.

SEC Interpretive Guidance on ICFR.



Entity-Level Controls.

Ongoing Monitoring.

Fraud Risk Considerations.

Amendments to SEC Rules Enterprise Risk Management.

Tax Accounting.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 7. Regulatory Bodies, Standard Setters, and Best Practices.


Primary Objectives.


The Sarbanes-Oxley Act of 2002.

Corporate Governance Provisions.

Financial Reporting Provisions.

Audit Function Provisions.

Enforcement of Federal Securities Laws.

Provisions Addressing Conduct of Other Individuals.

Evaluation of the Sarbanes-Oxley Act.

Global Reach of SOX.

Securities and Exchange Commission.

SEC Activities.

Public Company Accounting Oversight Board.

PCAOB Responsibilities.

PCAOB Standard-Setting Process.

Federal Sentencing Guidelines for Organizations.

American Institute of Certified Public Accountants.

AICPA Roles in the Post-SOX Era.

Financial Accounting Standards Board.

Government Accounting Standards Board.

International Federation of Accountants.

Committee of European Securities Regulators.

State Influence on Corporate Governance.

Corporate Governance and Courts.

Corporate Governance and Self-Regulatory Organizations.

Best Practices.

The Conference Board.

American Law Institute.

American Bar Association.

Institutional Investors.

Council of Institutional Investors.

National Association of Corporate Directors.

Business Roundtable.

Public Pension Funds.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 8. Internal Auditorsâ?? Roles and Responsibilities.


Primary Objectives.

Internal Auditing Function and Corporate Governance.

Internal Auditors as Assurance Providers.

Internal Auditors as Consultants.

Trend and Relevance of Internal Auditors.

Authorities and Responsibilities of Internal Auditors.



Internal Audit Outsourcing.

Audit Committee Relationship with Internal Auditor.

Internal Auditors' Role in Internal Control.

Institute of Internal Auditors.

Determinants of Effective Internal Audit.

Best Practices.

Internal Audit Performance.

Internal Audit Framework.

Internal Auditing Education.

The Internal Audit Opinion on Internal Controls.


Key Terms.

Review Questions

Discussion Questions.


Chapter 9. External Auditors' Roles and Responsibilities.


Primary Objectives.

External Auditing and Corporate Governance.

External Auditor Responsibilities.

Auditor Competency.

Audit Failures and Audit Quality.

Public Company Accounting Oversight Board.

Registration and Inspection of Public Accounting Firms.

PCAOB Auditing Standards.

PCAOB Enforcement Investigations.

Audit Committee Oversight of External Auditors.

Appointment, Compensation, and Retention of Auditors.

Preapproval of Audit Services and Permissible Nonaudit Services.

Review of Independent Auditor Plan for the Integrated Audit.

Review and Discussion of Financial Reports.

Monitoring the Auditor's Independence.

Auditor Rotation Requirement.

Independent Auditor Communication with the Audit Committee.

Auditor Independence.

Consolidation and Competition in Public Accounting Firms.

Integrated Audit Approach.

Audit Strategy.

Audit of Defined Benefit Pensions.

Auditor Liability Limitation Agreements.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 10. Stakeholders' Roles and Responsibilities.


Primary Objectives.


Shareholder Monitoring.

Shareholder Proxy Process.

Security Class Actions.

Institutional Investors.

Institutional Investors' Monitoring.

Governance of Institutional Investors

Mutual Funds.

Improving the Oversight Function.

Chief Compliance Officer.

Code of Ethics.

Hedge Funds.

Investor Activists.

Employee Monitoring.

Employee Ownership.

Employee Roles in Corporate Governance.

Employee Class Actions.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 11. Roles and Responsibilities of Other Corporate Governance Participants.


Primary Objectives.

Legal Counsel.

Communication with Legal Counsel.

SEC Rules of Professional Conduct for Lawyers.

Responsibilities of Legal Counsel.

Financial Advisors.

Securities Analysts.

Standard I: Information Flow.

Standard II: Analyst Conduct.

Standard III: Corporate Communication and Access.

Standard IV: Reviewing Analyst Reports or Models.

Standard V: Issuer-Paid Research Reports.

Investment Banks.


Key Terms.

Review Questions.

Discussion Questions.


Part Three Contemporary Issues in Business Ethics and Corporate Governance.

Chapter 12. Technology and Corporate Governance.


Primary Objectives.

Information Technology.

Cybercompany Model.

Electronic Communication with Shareholders.

Electronic Commerce.

Electronic Financial Reporting.

Extensible Business Reporting Language.

Costs and Benefits of XBRL.

XBRL Application.

Future of XBRL.

Continuous Auditing.

Technology Solutions.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 13. Corporate Governance in Private and Not-for-Profit Organizations.


Primary Objectives.

Types of NPOs.

State and Local Governments.

Health Care Organizations.

Colleges and Universities.

Charitable Organizations.

Purpose and Role of NPOs.

Public Trust in NPOs.

Governance of NPOs.

Governance of Institutions of Higher Education.

Ethics in Institutions of Higher Education.

Applicability of Corporate Governance Reforms to Private Companies and NPOs.

Governance Structure of NPOs.

Governance Principles

Governance Mechanisms.

Oversight Function of NPOs.

Duties of the Board of Directors/Trustees.

Board Committees.

Responsibilities of the Board of Directors/Trustees.

Attributes of Board Members.

Audit Committees of NPOs.

Best Practices.

Internal Control in NPOs.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 14. Corporate Governance in Transition.


Primary Objectives.

Historical Perspective of Corporate Governance.

Corporate Governance: A Global Perspective.

Corporate Governance in the United States.

Corporate Governance in the United Kingdom.

Corporate Governance in Germany.

Corporate Governance in Japan.

Corporate Governance in Other Countries.

Convergence in Corporate Governance.

Corporate Governance in Multinational Corporations.


Key Terms.

Review Questions.

Discussion Questions.


Chapter 15. Emerging Issues in Corporate Governance.


Primary Objectives.

Investor Confidence and Global Financial Markets.

Global Financial Markets.

Global Corporate Governance.

Corporate Governance Reporting.

Accountability: The New Business Imperative.

Social, Environmental, and Ethics Performance.

Corporate Social Responsibility.

Environmental Performance.

Ethics Performance.

Shareholder Challenging Issues.

Nomination Process.

Voting System.

Proxy Statements.

Challenges Facing Directors.

Director Accountability and Personal Liability.

Separation of the Chairperson of the Board and CEO Roles.

Director Compensation and Stock Ownership.

Executive Compensation.

Unresolved Director Issues.

SOX Compliance Challenges.

Financial Reporting Challenges.

Financial Restatements.

Enhanced Business Reporting.

Stock Options Accounting.

Antifraud Program and Practices.

Global Financial Reporting Standards.

Future of Financial Reporting.

Pension and OPEB Plans Accounting.

The Use of Derivatives Speculation.

Enterprise Risk Management.

XBRL-Generated Financial Reports.

Emerging Auditing Issues.

Auditor Independence.

Auditor Changes.

Engagement Letters.

Audit Failure.

Integrated Audit Approach.

Concentration of and Competition in Public Accounting Firms.

Continuous Auditing.


Audit Report.

Auditor Liability.

Audit Implications of Convergence to IFRS.


Key Terms.

Review Questions.

Discussion Questions.



  • Chapter pedagogy: each chapter contains Chapter objectives, summaries, essential terms, objective questions, discussion questions, essays, and cases
  • Relevancy: This book exposes readers to all oversight functions of corporate governance (oversight, managerial, compliance, internal audit, external audit, legal and advisory, and monitoring).
  • Comprehensiveness: this book presents an integrated approach to corporate governance and business ethics
  • Content Materials: the text incorporates corporate governance reforms and best practices from a global perspective and business ethics from behavioral and applied aspects.
  • Approach: book provides maximum flexibility in presenting the amount and order of materials
  • Organization: This book is developed on five overriding themes
  1. Study of corporate governance is by its nature interdisciplinary and requires knowledge of laws, rules, regulations, finance, economics, politics, organizational behavior, accounting, information systems, psychology, and other disciplines.
  2. There is a need for a conceptual framework and knowledge base to collect comprehensively all aspects of corporate governance in a single setting such as in this book.
  3. There should be a broad and integrated approach in studying the embedded roles and responsibilities of all corporate governance participants including investors, the board of directors, management, auditors, legal counsel, financial advisors, policymakers, regulators, and the global business and academic communities
  4. Corporate governance is a global phenomenon and thus, there should be an international approach because corporate governance reforms in different countries are shaped by their legal, political, and cultural environment. Today’s corporate governance has emerged as best practices worldwide
  5. Ethics consist of moral values, personal integrity, professional accountability, business legitimacy, equity, and fairness which are viewed differently by different people as acceptable standards of behavior.