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1st session Organizational Architecture and Accounting

VIEWS: 3 PAGES: 33

									                     4th session:
Faculdade de    Corporate Governance
Ciências
Económicas e
Empresariais
               and Financial accounting
Universidade
Católica
               measures of performance
Portuguesa




               Performance Evaluation
               IMSc in Business Administration
               October-November 2007

  12/04/2012          Ricardo F Reis
                    rireis@fcee.ucp.pt
Faculdade de
Ciências
Económicas e
Empresariais
Universidade
                  Corporate Governance
Católica
Portuguesa              Sarbanes-Oxley
                        “Five years under the thumb”

                        Auditing Profession

                  Financial Performance Measures
                          Earnings per Share

  12/04/2012                        Ricardo F Reis     Session 04 - 2/33
  Performance Evaluation          rireis@fcee.ucp.pt
                 Sarbanes-Oxley
Faculdade de
Ciências
                  The Sarbanes-Oxley Act of 2002, also
Económicas e         known as the Public Company
Empresariais
                     Accounting Reform and Investor
Universidade
Católica             Protection Act of 2002 and commonly
Portuguesa           called SOX or Sarbox; is a United
                     States federal law signed into law on
                     July 30, 2002 in response to a number of
                     major corporate and accounting
                     scandals including those affecting Enron,
                     Tyco International, Peregrine Systems
                     and WorldCom.

  12/04/2012                     Ricardo F Reis      Session 04 - 3/33
  Performance Evaluation       rireis@fcee.ucp.pt
                 TITLE I - “Public Company
                 Accounting Oversight Board
                 (PCAOB)”
Faculdade de
Ciências          PCAOB to provide independent
Económicas e
Empresariais
                     oversight of public accounting firms
Universidade         providing audit services ("auditors"). It
Católica
Portuguesa
                     also creates a central oversight board
                     tasked with registering auditors, defining
                     the specific processes and procedures
                     for compliance audits, inspecting and
                     policing conduct and quality control, and
                     enforcing compliance with the specific
                     mandates of SOX.
  12/04/2012                      Ricardo F Reis      Session 04 - 4/33
  Performance Evaluation        rireis@fcee.ucp.pt
                 TITLE II - “Auditors
                 Independence”
Faculdade de
Ciências          Establishes standards for external
Económicas e
Empresariais         auditor independence, to limit conflicts of
Universidade
Católica
                     interest. It also addresses new auditor
Portuguesa           approval requirements, audit partner
                     rotation policy, conflict of interest issues
                     and auditor reporting requirements. This
                     title restricts auditing companies from
                     doing other kinds of business apart from
                     auditing with the same clients.
  12/04/2012                      Ricardo F Reis       Session 04 - 5/33
  Performance Evaluation        rireis@fcee.ucp.pt
                 TITLE III - “Corporate
                 Responsibility”
Faculdade de
Ciências
                  This title mandates that senior executives take
Económicas e         individual responsibility for the accuracy
Empresariais
                     and completeness of corporate financial
Universidade
Católica
                     reports. It enumerates specific limits on the
Portuguesa           behaviours of corporate officers and describes
                     specific forfeitures of benefits and civil penalties
                     for non-compliance. For example, Section 302
                     implies that the company board (Chief
                     Executive Officer, Chief Financial Officer)
                     should certify and approve the integrity of their
                     company financial reports quarterly. This helps
                     establish accountability.
  12/04/2012                        Ricardo F Reis           Session 04 - 6/33
  Performance Evaluation          rireis@fcee.ucp.pt
                 TITLE IV - “Enhanced
                 Financial Disclosures”
Faculdade de
Ciências
                  Title IV describes enhanced reporting
Económicas e         requirements for financial transactions,
Empresariais
                     including off-balance sheet transactions, pro-
Universidade
Católica
                     forma figures and stock transactions of
Portuguesa           corporate officers. It requires internal controls
                     for assuring the accuracy of financial reports
                     and disclosures, and mandates both audits and
                     reports on those controls. It also requires timely
                     reporting of material changes in financial
                     condition and specific enhanced reviews by the
                     SEC or its agents of corporate reports.

  12/04/2012                        Ricardo F Reis          Session 04 - 7/33
  Performance Evaluation          rireis@fcee.ucp.pt
                 TITLE V - “Analyst Conflicts
                 of Interest”
Faculdade de
Ciências          Title V defines the codes of conduct for
Económicas e
Empresariais         securities analysts and requires
Universidade
Católica
                     disclosure of knowable conflicts of
Portuguesa           interest.




  12/04/2012                     Ricardo F Reis      Session 04 - 8/33
  Performance Evaluation       rireis@fcee.ucp.pt
                 TITLE VI - “Commission
                 Resources and Authority”
                  Title VI defines the SEC’s authority to
Faculdade de
Ciências
Económicas e
Empresariais         censure or bar securities professionals
Universidade
Católica
                     from practice and defines conditions
Portuguesa           under which a person can be barred
                     from practicing as a broker, adviser or
                     dealer.




  12/04/2012                     Ricardo F Reis      Session 04 - 9/33
  Performance Evaluation       rireis@fcee.ucp.pt
                 TITLE VII - “Studies and
                 Reports”
Faculdade de
Ciências          Title VII is concerned with conducting
Económicas e
Empresariais         research for enforcing actions against
Universidade
Católica
                     violations by the SEC registrants
Portuguesa           (companies) and auditors.




  12/04/2012                     Ricardo F Reis     Session 04 - 10/33
  Performance Evaluation       rireis@fcee.ucp.pt
                 TITLE VIII - “Corporate and
                 Criminal Fraud Accountability”
Faculdade de
Ciências          Title VIII is also referred to as the
Económicas e
Empresariais         “Corporate and Criminal Fraud Act of
Universidade
Católica
                     2002.” It describes specific criminal
Portuguesa           penalties for fraud by manipulation,
                     destruction or alteration of financial
                     records or other interference with
                     investigations, while providing certain
                     protections for whistle-blowers.


  12/04/2012                      Ricardo F Reis      Session 04 - 11/33
  Performance Evaluation        rireis@fcee.ucp.pt
                 TITLE IX - “White Collar Crime
                 Penalty Enhancement”
                  This section is also called the “White
Faculdade de
Ciências
Económicas e
Empresariais         Collar Crime Penalty Enhancement Act
Universidade
Católica
                     of 2002.” This section increases the
Portuguesa           criminal penalties associated with white-
                     collar crimes and conspiracies. It
                     recommends stronger sentencing
                     guidelines and specifically adds failure to
                     certify corporate financial reports as a
                     criminal offence.
  12/04/2012                      Ricardo F Reis      Session 04 - 12/33
  Performance Evaluation        rireis@fcee.ucp.pt
                 TITLE X - “Corporate Tax
                 Returns”

Faculdade de
Ciências          Title X consists of one section, which
Económicas e
Empresariais         states that the Chief Executive Officer
Universidade
Católica
                     should sign the company tax return.
Portuguesa




  12/04/2012                      Ricardo F Reis     Session 04 - 13/33
  Performance Evaluation        rireis@fcee.ucp.pt
                 TITLE XI - “Corporate Fraud
                 Accountability”
                  Also known as “Corporate Fraud
Faculdade de
Ciências
Económicas e
Empresariais         Accountability Act of 2002” . It identifies
Universidade
Católica
                     corporate fraud and records tampering
Portuguesa           as criminal offences and joins those
                     offences to specific penalties. It also
                     revises sentencing guidelines and
                     strengthens their penalties. This enables
                     the SEC to temporarily freeze large or
                     unusual payments.
  12/04/2012                      Ricardo F Reis      Session 04 - 14/33
  Performance Evaluation        rireis@fcee.ucp.pt
                 The Certified Public
                 Accountant and the Auditor’s
                 Opinion
Faculdade de
Ciências          An audit is an examination of a
Económicas e
Empresariais       company’s transactions and the resulting
Universidade
Católica
                   financial statements
                  The auditor’s opinion describes the
Portuguesa


                   scope and results of the audit and a
                   judgment that the financial statements
                   prepared by management are accurate



  12/04/2012                   Ricardo F Reis        Session 04 - 15/33
  Performance Evaluation     rireis@fcee.ucp.pt
                 Public Accounting Firms
Faculdade de
Ciências          The four largest public accounting firms
Económicas e
Empresariais         are
Universidade
Católica
                          Deloitte Touche Tohmatsu
Portuguesa
                          Ernst & Young
                          KPMG International
                          PricewaterhouseCoopers
                  97% of the firms listed on the NYSE are
                     clients of these four firms

  12/04/2012                         Ricardo F Reis     Session 04 - 16/33
  Performance Evaluation           rireis@fcee.ucp.pt
                 Public Accounting Firms
Faculdade de
Ciências          Each firm has annual billings in excess
Económicas e
Empresariais       of $1 billion
Universidade
Católica          All firms must follow generally accepted
Portuguesa
                   accounting principles (GAAP)
                          The broad concepts and detailed practices
                           of preparing and distributing financial
                           statements



  12/04/2012                         Ricardo F Reis       Session 04 - 17/33
  Performance Evaluation           rireis@fcee.ucp.pt
                 Sarbanes-Oxley Act
Faculdade de      Established the Public Company Accounting
Ciências
Económicas e       Oversight Board to regulate public accounting
Empresariais       and to set standards for audit procedures
Universidade       through the issuance of generally accepted
Católica           auditing standards (GAAS)
Portuguesa
                  Prohibits public accounting firms from providing
                   audit clients with certain non-audit services
                  Requires rotation every 5 years of the lead
                   audit or coordinating partner and the reviewing
                   partner on an audit



  12/04/2012                      Ricardo F Reis        Session 04 - 18/33
  Performance Evaluation        rireis@fcee.ucp.pt
                 Sarbanes-Oxley Act
Faculdade de
Ciências          Provides regulation of corporate governance
Económicas e
Empresariais
                          Requiring boards to appoint an audit committee
Universidade
                           composed only of “independent” directors
Católica                  Requiring CEOs and chief financial officers (CFOs)
Portuguesa
                           to personally sign a statement certifying the
                           appropriateness and fairness of their companies’
                           financial statements
                          Increasing criminal penalties for knowingly
                           misreporting financial information




  12/04/2012                           Ricardo F Reis           Session 04 - 19/33
  Performance Evaluation             rireis@fcee.ucp.pt
                 Professional Ethics
Faculdade de
Ciências          Members of the AICPA must abide by a code of
Económicas e
Empresariais
                   professional conduct
Universidade      The Institute of Management Accountants has a
Católica
Portuguesa
                   code of ethics for management accounts
                  Auditors and management accountants have
                   professional responsibilities concerning
                   competence, confidentiality, integrity, and
                   objectivity



  12/04/2012                     Ricardo F Reis      Session 04 - 20/33
  Performance Evaluation       rireis@fcee.ucp.pt
                 Professional Ethics
Faculdade de
Ciências          Ethical standards are personal and
Económicas e
Empresariais       depend on the values of the individual
Universidade
Católica          A successful manager must recognize
Portuguesa
                   the ethical dimensions of a situation and
                   act with absolute integrity




  12/04/2012                    Ricardo F Reis     Session 04 - 21/33
  Performance Evaluation      rireis@fcee.ucp.pt
                 Professional Ethics
Faculdade de
Ciências          Despite the criticism of accounting ethics,
Económicas e
Empresariais
                   accountants were responsible for revealing the
Universidade
                   problems in many of the recent corporate
Católica           scandals
Portuguesa
                  Companies often rely on accountants to
                   safeguard the ethics of the company
                  WorldCom and Enron whistle-blowers became
                   two of the three 2002 Persons of the Year in
                   Time magazine (Cynthia Cooper of Worldcom
                   and Sherron Watkins of Enron)

  12/04/2012                      Ricardo F Reis         Session 04 - 22/33
  Performance Evaluation        rireis@fcee.ucp.pt
Faculdade de
Ciências
Económicas e
Empresariais
Universidade
Católica
Portuguesa




  12/04/2012                 Ricardo F Reis     Session 04 - 23/33
  Performance Evaluation   rireis@fcee.ucp.pt
Faculdade de
               Financial accounting
Ciências
Económicas e
Empresariais
                   measures of
Universidade
Católica
Portuguesa
                   performance

               Computing Earnings per Share
                          (EPS)



  12/04/2012       Ricardo F Reis
                 rireis@fcee.ucp.pt
                 Computing Earnings per Share
                 (EPS)
Faculdade de
Ciências         •         Earnings per share indicates the
Económicas e
Empresariais               income earned by each share of
Universidade
Católica
                           common stock.
Portuguesa
                 •         Reported at the end of the income
                           statement
                 •         Should report intermediate
                           components as well.


  12/04/2012                         Ricardo F Reis     Session 04 - 25/33
  Performance Evaluation           rireis@fcee.ucp.pt
                 EPS on Simple Capital
                 Structure
Faculdade de
Ciências          Simple Capital Structure means that there is
Económicas e
Empresariais
                     only common stock and there is no potential
Universidade
                     common stock (securities that can potentially
Católica             be converted into common stock and dilute
Portuguesa
                     EPS).

                                           Net Income
                  EPS=
                           Weighted Average Number of Shares


  12/04/2012                       Ricardo F Reis        Session 04 - 26/33
  Performance Evaluation         rireis@fcee.ucp.pt
                 Preferred Stock Dividends
Faculdade de
Ciências          Preferred Stock Dividends are compensation
Económicas e
Empresariais
                     not available for common stockholders,
Universidade
                     therefore they are subtracted from the Net
Católica             Income.
Portuguesa



                               Net Income – Preferred Dividends
               EPS=
                           Weighted Average Number of Common Stock



  12/04/2012                        Ricardo F Reis       Session 04 - 27/33
  Performance Evaluation          rireis@fcee.ucp.pt
                 Weighted Average Number od
                 Shares Outstanding
Faculdade de
Ciências          Weighted by the fraction of the period
Económicas e
Empresariais       they are outstanding
Universidade
Católica          Find the equivalent number of whole
Portuguesa
                   shares outstanding for the year.




  12/04/2012                   Ricardo F Reis     Session 04 - 28/33
  Performance Evaluation     rireis@fcee.ucp.pt
                 Stock Dividends and Stock
                 Splits
Faculdade de
Ciências          When these happen computation of the
Económicas e
Empresariais       average number of shares outstanding
Universidade
Católica
                   needs to be redone.
Portuguesa
                  A stock dividend or split does not
                   change the shareholders’ total
                   investment.




  12/04/2012                  Ricardo F Reis     Session 04 - 29/33
  Performance Evaluation    rireis@fcee.ucp.pt
                 Complex Capital Structure
Faculdade de
Ciências          Dilutive securities are securities that can
Económicas e
Empresariais         be converted into common stock
Universidade
Católica
                     (through conversion or exercise) and will
Portuguesa           dilute earnings per share.




  12/04/2012                     Ricardo F Reis     Session 04 - 30/33
  Performance Evaluation       rireis@fcee.ucp.pt
                 Diluted EPS
                   Note that:
Faculdade de
Ciências             Only dilutive securities are to be reported!
Económicas e
Empresariais         Antidilutive are not considered.
Universidade
Católica
Portuguesa



                Net income- Preferred
                                                                  Impact of Option,
                      dividends
                                                Impact of          Warrants, and
EPS=                                      -
                                               Convertibles
                                                              -
                                                                    Other Dilutive
               Weighted Average Shares
                     Outstanding                                     Securities



  12/04/2012                         Ricardo F Reis                 Session 04 - 31/33
  Performance Evaluation           rireis@fcee.ucp.pt
                 Diluted EPS – Convertible
                 Securities
                 If-Converted Method
Faculdade de
Ciências         1. Conversion of the convertible securities
Económicas e
Empresariais        as soon as possible (beginning of
Universidade
Católica
                    period or issuance)
Portuguesa
                 2. Elimination of related interest, net of
                    tax.
                  Logic is that if the convertible securities
                    were converted, then they didn’t
                    produce any interest and net income
                    has to be filtered of this.
  12/04/2012                    Ricardo F Reis      Session 04 - 32/33
  Performance Evaluation      rireis@fcee.ucp.pt
                 Diluted EPS – Options and
                 Warrants
                 Treasury Stock Method
Faculdade de
Ciências         1. Exercise of options or warrants as soon
Económicas e
Empresariais        as possible (beginning of period or
Universidade
Católica
                    issuance)
Portuguesa
                 2. Proceeds from the exercise are used to
                    purchase common stock.




  12/04/2012                   Ricardo F Reis     Session 04 - 33/33
  Performance Evaluation     rireis@fcee.ucp.pt

								
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