 Hello and welcome to this session in which we will discuss corporate governance. Corporate governance is important when we have what's called agency problem. And what is an agency problem? Agency problem is when the shareholders of the company, the owners of the company, are separate than the people who are running the company on a day to day basis. And as a result there could be some conflict of interest or what we call agency problem between the shareholders and managers. Managers may be working in their own best interests rather than the shareholders that hire them. As a result we have to introduce this concept called corporate governance. Now this concept is covered in auditing which is the CPA audit exam as well as the CPA BEC section. In this session we're going to be focusing on the BEC section of the exam. So if you are a CPA candidate most likely you are listening to this you're a CPA candidate. I strongly suggest you take a look at my website farhatlectures.com. 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Please connect with me on LinkedIn if you haven't done so and take a look at my LinkedIn reviews actual people who use my system to pass the exam like this recording share it connect with me on Instagram Facebook LinkedIn and Reddit and Twitter obviously. So what is corporate governance what is this idea well it's a system it's a system it's a system of rules practices processes by which the firm direct and controlled the operation to ensure that the entity works toward meeting its objective of its stakeholders. Now what are who are the stakeholders and the stakeholders are a lot of people but mainly we're talking about shareholders suppliers the community in which the company operate government so you have to make sure you have a system that you are going to achieve your objective while complying with all your stakeholders and obviously stakeholders are different than the shareholders the shareholders are part of the stakeholders okay so what influence this corporate governance what influence this the system of rules and practices well we have external forces and internal forces first is your corporate document when you start as a company you are you have to set out your rules your rules and regulation are set up in the corporate charter in the bylaws in in something called codes of ethics for the company in addition to this group you have the shareholders who are the owners of the company they have to make sure the company is running well because they own the company obviously they have their money on the line therefore they're going to contribute to this corporate governance you have the board of directors and the officers which are elected by the shareholders and we'll talk about each group separately then you have the internal audit functions that that works on behalf of the company to make sure the company is following rules and regulations which we'll talk about this group as well you have management management who's working on your behalf and you have the external auditors as we said we have internal forces and external forces and you are if you are a publicly traded company the external auditors are monitored by the pcaob then also the company is regulated by the sec those are external forces that influence the corporate governance so all these we'll see six groups but they don't have to be exclusive six six things that works together as a system to help make sure you are achieving your objective and not committing fraud or illegal activities or an ethical behavior starting with the corporate documents you need to understand the difference between article of incorporation and bylaws each company is incorporated in a state rather than the federal that rather than federal government and basically article of article of incorporation it's basically a statement that you submit to the state and what do you have in that state what do you have in that document what is the name what's the name of the corporation how many shares do you want to issue okay the street address of the initial registered office the name of the registered agent of their office usually it's a usually it's the lawyer name and an address of each incorporator who's creating this company the purpose of the company so notice all of these are general rules articles of incorporation then you have to have bylaws bylaws deals with people that run the company basically we're dealing with officers and directors it basically it gives gives us more little bit more specificity it tells us about their authority about their tenure how long they can serve about their compensation structure okay if the decision if we want to if we want to issue new stocks what are the decisions to do so so notice the article of incorporation they're very general the bylaws are more specific so it's one way for you to remember this also the company might have a code of addicts not my most company should have a code of addicts what is the code of addicts basically sets of rules and regulation that we share with the company employees to help promote ethical behavior doing the right thing now the best thing to show is to should to do the right thing is setting by example so management and owners especially management they have to set this this by example rather than putting this on a piece of paper but basically a code of addicts sets out the organizational ethical guidelines and best practices to follow for honesty integrity and professionalism you know basically it answers it helps you answer questions what should you do if you face an ethical dilemma what should I do in this situation well maybe the code of addicts will help you will help you if not we might have a hotline or we might have a committee that could help you okay violating the code of addicts should result in sanctions including termination to make sure to make sure employees are taking the code of addicts seriously so if someone violated the code of addicts and there are no consequences that's bad messaging for everyone else it means guess what we don't care about the code of addicts we encourage you to do to commit fraud guess what because we are not going to prosecute we're not going to penalize you for it so the code of addicts would help in this corporate governance we also have the shareholders who are the shareholders simply put I mean I have old men here I don't know why I have this picture they don't have to be old those are the people that contribute money when you buy a stock of a company you become a shareholder and what we're talking about here is common shareholders because we have common shareholders and prefer shareholders we're talking about common shareholders there are actual owners and investors in the company okay they have a voting power and the most important voting power is to select a group called the board of directors which we'll talk about next we'll talk about this group next they select this group they vote this group then they can vote to amend the article of incorporation they they could also vote on approval of merger if you want to merge with a company or any other important matter so they do have a role to play but one of the most important role that they have is select this group board of directors the board of directors is that group that they have a general oversight about the company a general oversight mean they don't have a day-to-day operation responsibilities we're gonna talk about who has this responsibility obviously you already know management top management but the board of directors they have other duties for the company first they have to select the top management like the CEO maybe the CFO as well they decide on how to best finance the company are we gonna issue stocks are we gonna issue bonds they decide upon mergers and acquisitions are we gonna be buying another company are we gonna be merging with another company they decide on dividend should we declare dividend or wait maybe this is not the right time to do so they might decide on management compensation they might have they might have a subcommittee compensation compensation committee to decide how much we should compensate they might have a risk committee within the board of directors you know another risk committee to evaluate the risk what risk are we facing how are we handling risk how are we managing risk and most importantly they have an audit committee and we talk a lot about the audit committee in the auditing course it's the committee that hires the auditors that then it appears it's more independent than management hiring the auditors now so now we talked about shareholders we said shareholders or stockholders they elect the board of directors the board of directors what they're gonna do they're gonna select officers people that run the company on a day-to-day operation even the CEO is considered basically an officer or an employee now the CEO will select other individuals lower level management to run the company they would hire employees but simply put all of those are agents or employees of the company and because of that they can easily bind the company in contract so you have to be very careful on how we monitor in them now directors and officers they have the fiduciary duties for the company what what does that mean it means they have to act in the best interest of the company that they represent means they have a duty of loyalty and the duty of care what is the duty of loyalty they have to act without any personal economic conflict so they have to say we're working for the company so if there's any opportunity to benefit themselves on on on the expense of the company they should not take it because they have a duty of loyalty and they have the duty of care to the company what does that mean well it means they ask they must act in the same manner as a reasonably prudent person in their position with how would a reasonable person act and you should act that way you should act in good faith you can rely on experts like lawyers investment bankers or any type of an expert but you have to disclose any conflict of interest if you have any and they are protected by something called the business judgment rule basically from personal liability if they make mistakes and employees and directors they could make mistakes as long as they acted in good faith as long as they acted without committing fraud or gross negligence or in an illegal manner they should be fine they should be fine but again they have to prove that that they did not act that way we also have a group called internal auditors that also play a part in corporate governance and think of them as the security all the police officers inside the company they reviewed the organization's business processes on a regular basis they evaluate the risk they communicate the risk with the with top management they protect against fraud and theft of the organizational assets ensure that the organization is compliant with rules and regulation they evaluate any internal control and make recommendations and improvements especially if the external auditor did so they basically identify any short fall or gaps in the process and they coordinate the activities between the external auditor the board of directors and management that's an important role that they play and they promote they constantly promote the appropriate ethics and values within the organization that's another group that plays an important role and obviously we cannot ignore management and external auditors right management is responsible for again the preparation and fair presentation of the financial statements and day-to-day operation as well also they're responsible for designing and implementing the internal control that the internal auditors review and make changes to and make sure that we're in compliance and we have the external auditor obviously the responsibility is to express an opinion about the fair presentation of the financial statements and if it's a publicly traded company well guess what then they are basically overseen by the PCAOB and overseen by the SEC also the auditor must also assess the internal control which also help in the corporate governance so all these groups together that we talked about from the groups including the corporate documents the bylaws the code of ethics and the corporate charters the shareholders the board of directors the internal audit function management external auditors they all work together for the benefit of the company for the corporate governance to make sure we are achieving our objective ethically we're not violating any rules and regulations we are not committing anything illegal we want to make sure the company is being run smoothly this is what corporate governance is in all this group they work together in sync to make sure this happens once again at the end of this recording i'm going to invite you to invite you to visit farhatlectures.com i don't replace your cpa review course i can be a supplement i can help you i can be the vitamin pill that's going to help you understand the material and if not for anything take a look at my website to find out how well or not well for that matter your university doing on the cpa exam remember i do have other resources for other courses and cpa sections good luck study hard and of course stay safe