CHAPTER 3

“SECURITIES AND EXCHANGE COMMISSION (SEC) CODE OF

CORPORATE GOVERNANCE”

MULTIPLE CHOICE:
1. A
2. D

EXERCISES
EXERCISE 1:
Below is a summary of the SEC corporate governance requirements of companies
publicly-listed in the stock exchange. For each requirement, state how it is intended to
help address the risk of fraud in publicly traded organizations.

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a. Boards need to consist of at least 3 independent directors or 1/3 of the board is

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higher.
It helps address the risk of fraud in publicly traded organizations as it ensures the

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exercise of independent judgement on corporate affairs and proper oversight of
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managerial performance, including prevention of conflict of interests and balancing
of competing demands of the corporation. This is also practiced to ensure that no
director or small group of directors can dominate the decision-making process.
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b. Boards need to hold regular executive sessions of independent directors without

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management present.
It helps address the risk of fraud in publicly traded organizations as it ensures that
proper checks and balances are in place within the corporation.
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c. Boards must have a corporate governance committee composed of at least 3 of

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independent directors.
Corporate governance committee exists to assist the board in the performance of its
corporate governance responsibilities. They are tasked with ensuring compliance
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with and proper observance of corporate governance principles and practices.

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d. The corporate governance committee must have a written charter that addresses
the committee’s purpose and responsibilities, and there must be annual
performance evaluation of the committee.
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Corporate governance committee must have a written charter stating in plain terms
their respective purposes, memberships, structures, operations, reporting processes,
resources, and other relevant information. It serves as the standards for evaluating
performance of the committee. It exists to avoid any overlapping functions with
other existing committees in a business organization.

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 e. Boards must have an audit committee with a minimum of three independent
members.
Audit committee exists to enhance the board’s oversight capability over the
company’s financial reporting, internal control system, internal and external audit
processes, and compliance with applicable laws and regulations. There must be a
minimum of three independent members, including the chairman, to ensure that
they are formally and properly doing their duties and responsibilities without bias.

f. The audit committee must have a written charter that addresses the committee’s
purpose and responsibilities, and the committee must produce an audit committee
report; there must also be an annual performance evaluation of the committee.
The audit committee must have a written charter which formally defines the role of
internal audit and the audit plan as well as oversees the implementation of the IA
charter. It includes the audit committee’s responsibility on assessing the integrity and
independence of external auditor and exercising oversight to review and monitor the

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external auditor’s independence and objectivity and the effectiveness of the audit
process. There is also an annual performance evaluation of the committee to review

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and monitor the external auditor’s suitability and effectiveness on an annual basis.

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EXERCISE 2:
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Below is a summary of the SEC listing requirements for audit committee
responsibilities of companies listen on this stock exchange. For each requirement,
state how it is intended to help address the risk of fraud in publicly traded
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organizations.
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a. Obtaining each year, a report by the external auditor that addresses the company’s
internal control procedures, any quality control or regulatory problems, and any
relationships that might threaten the independence of the external auditor.
This helps address the risk of fraud in publicly traded organizations as the report by
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the external auditor addresses condition of the company’s internal control

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procedures as well as problems in regulations and quality control, this is done to deal
with the potential conflict of interests.
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b. Discussing the company’s financial statements with management and the external
auditor.
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This helps address the risk of fraud in publicly traded organizations as it discusses if
there are errors or misstatements in the company’s financial statements, as well as
the assurances if the financial information stated are correct and unbiased. This is
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also done to monitor and facilitate compliance with applicable laws, rules and
regulations.

c. Discussing in its meetings the company’s earnings press releases, as well as

financial information and earnings guidance provided to analysts.

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 This helps address the risk of fraud in publicly traded organization as the financial
analyst will be giving his professional analysis in the given financial information
regarding the company’s earnings. The information is provided to the company’s
shareholders to show the financial results in a given period, as well as insights about
the financial performance of the company.

d. Discussing in its meetings policies with respect to risk assessment and risk
management.
This helps address the risk of fraud in publicly traded organizations as it ensures
proper risk assessment and risk management. There will be a discussion regarding
policies which affects the profitability of the company, this is important in identifying
possible risks, problems, or disasters before they happen and enables the company
to set up procedures to avoid the risk or minimize its impact to the business
organization.

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e. Meeting separately with management, internal auditors, and the external auditor
on a periodic basis.

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This helps address the risk of fraud in publicly traded organization as the
management, internal and external auditors will be discussing the company’s

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financial statements and all the financial information it comprises. To ensure that the
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management discloses in the financial reports the correct financial information and
the significant findings that has a significant impact to the company.
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f. Reviewing with the external auditor any audit problems or difficulties that they
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had with management.

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This is done to ensure the integrity of the external auditor in his line of work in the
company. This address concerns of audit problems or difficulties wherein the
management may have an issue regarding cooperation or compliance with the
applicable laws, rules and regulations. This also ensures the independence of the
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external auditor ensuring that there are conflicts regarding his relationship with the
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company.

g. Setting clear hiring policies for employees or former employees of the external
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auditors.
This is required by all applicable laws to formally set hiring policies regarding
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employees of the external auditor. Employees must have a significant background in

this line of work and must meet the requirements of applicable law and listing
standards, to ensure that they are the right employees of the external auditor that
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can participate in the capacity of auditing work.

h. Reporting regularly to the board of directors.

Audit committee reports regularly to the board of directors as it has a direct
relationship with the board to discuss audit plans, audit findings and other items of
audit which are held significant that has a direct impact in the business organization.

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 The audit committee is responsible in overseeing financial reporting and related
matters that will be reported to the board of directors to ensure the effectiveness of
the entity’s internal control and risk management systems.
-----END OF CHAPTER 3-----

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