Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-1
Turner/Accounting Information Systems, 2e
Solutions Manual
Chapter 5
Concept Check
1. b
2. c
3. d
4. d
5. a
Discussion Questions
13. (SO 1) Why is tone at the top so important to corporate governance?
14. (SO 1) Why do you think companies that practice good corporate
governance tend to be successful in business? Good corporate
15. (SO 2) Which stakeholder group, internal or external, is more likely to
be affected by corporate governance, and which has a direct affect on
corporate governance? External stakeholders are most affected by
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-2
16. (SO 2) Explain how it is possible that a shareholder could be
considered both an internal and external stakeholder. Shareholders
are owners of the company and could therefore be considered internal;
17. (SO 2) Why is the Board of Directors considered an internal
stakeholder group, when it is required to have members who are
independent of the company? Because the board of directors has the
18. (SO 2) How can internal auditors maintain independence, since they
are employees of the company? Internal auditors should not have any
19. (SO 3) Identify the four functions of the corporate governance process.
The four functions of the corporate governance process are:
management oversight, internal controls and compliance, financial
stewardship, and ethical conduct.
20. (SO 3) Describe the key connection between tone at the top and
management oversight. Management oversight is the set of policies
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-3
21. (SO 3) Explain the connection between fiduciary duty and financial
stewardship. Fiduciary duty means that management has been
22. (SO 4) Why do many accountants claim that corporate governance
was born in the 1930s? The stock market crash of 1928 is believed to
23. (SO 4) What is the primary difference between the Securities Act of
1933 and the Securities Exchange Act of 1934? The Securities Act of
1933 requires full financial disclosure before securities can be sold,
while the Securities Exchange Act of 1934 requires ongoing disclosure
for registered companies.
24. (SO 5, 6) Why did the SEC establish the PCAOB? The PCAOB was
25. (SO 5) Why can auditors no longer be involved in helping their audit
clients establish accounting information systems? Around the period
26. (SO 5) Under what conditions are auditors permitted to perform non–
audit services for their audit clients? Non-audit services are permitted
only if the auditor has obtained prior approval from the client’s audit
committee.
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-4
27. (SO 5, 6) How has the Sarbanes-Oxley Act increased the importance
of audit committees in the corporate governance process? The SOX
28. (SO 5) Identify the six financial matters that must be certified by a
company’s top officers under the requirements of Section 302 of the
Sarbanes-Oxley Act. The following matters must be certified by a
company’s top officers: (1) the signing officers have reviewed the
29. (SO 5) Explain the relationship between Section 401 of the Sarbanes-
Oxley Act and the concept of transparency. Transparency in financial
30. (SO 5) Explain the difference between management’s responsibility
and the company’s external auditors’ responsibility regarding the
company’s internal controls under Section 404 of the Sarbanes-Oxley
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-5
31. (SO 5) Explain why Section 409 of the Sarbanes-Oxley Act has placed
more pressure on members of IT departments within public
companies. Section 409 of the SOX Act requires real-time disclosures
32. (SO 5) How is the Sarbanes-Oxley Act forcing corporations to become
more ethical? The SOX Act requires all public companies to have a
33. (SO 6) Why do corporate leaders see their jobs as more risky since the
Sarbanes-Oxley Act became effective? There are several “sign–offs”
that corporate leaders must do. If a corporate officer signs-off without
due care or fraudulently, he or she can be subject to penalties.
34. (SO 6) Which governing body holds the top position of management
oversight? The corporate board of directors holds the top
management oversight position
.
35. (SO 6) Identify two ways that companies are making efforts to improve
the financial stewardship of their managers. In order to improve the
36. (SO 7) How can IT departments assist corporate managers in fulfilling
their corporate governance roles? A company’s IT infrastructure is a
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-6
37. (SO 8) How is it that management’s role as financial stewards may be
considered a conflict of interest with their position as employees of the
company? Managers often have compensation plans in which
Brief Exercises
38. (SO 2) Why are shareholders sometimes considered internal
stakeholders and sometimes considered external stakeholders?
39. (SO 3) Is it possible for financial information to be accurate and
complete, but not transparent? Similarly, is it possible for financial
information to be transparent, but not accurate and complete? Explain.
40. (SO 3) Earnings management involves lying about the company’s
financial results in order to provide a more favorable impression to
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-7
management within a corporation. Besides financial stewardship the
other three functions of corporate governance are management
41. (SO 4) Describe how the characteristics of the financial markets in the
1980s eventually led to the creation of the Sarbanes-Oxley Act of
2002. In the 1980s, there was intense pressure for companies to met
or beat their earnings targets. As a result, creative accounting
42. (SO 5) Although the Sarbanes-Oxley Act of 2002 applies to public
companies, many private business organizations have been impacted
by this legislation, especially if they are suppliers to a public company.
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-8
43. (SO 6, 7) Describe at least three ways that the Sarbanes-Oxley Act
and the increased attention to corporate governance have put more
emphasis on the role of those responsible for the company’s
44. (SO 8) Why do you think it is particularly challenging for companies to
maintain ethical behavior during difficult financial times? During difficult
financial times, it is particularly challenging for companies to maintain
Problems
45. (SO 3) List the six steps for establishing internal controls and describe
how this process leads to stronger overall corporate governance. The
six-step process for internal controls includes the following:
1. Define the key activities and resources involved in each business
activity.
2. Define the objectives of each activity.
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-9
for documenting, monitoring, and improving the system as needed.
This provides for accurate and transparent financial reporting.
46. (SO 5, 6) List the items that must be certified by corporate
management in accordance with the provisions of the Sarbanes-Oxley
Act. Discuss how these responsibilities have likely changed the
period-to-period activities of the certifying managers. Top managers
must submit a certified statement to accompany each annual and
quarterly report to acknowledge their responsibility for the contents of
the financial reports and the underlying system of internal controls. The
5. They have disclosed any instances of fraud or internal control
deficiencies.
6. They have indicated whether or not any significant changes in
internal controls have occurred since the date of their most recent
evaluation.
The responsibilities inherent in these certified statements have
likely resulted in significant changes in the activities of the signing
47. (SO 6) Identify the costs and benefits of complying with the Sarbanes-
Oxley Act of 2002. Do you think the costs are justified? The costs of
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-10
Students’ responses to the question of SOX’s justification are likely
to be mixed. Some may criticize SOX for its extreme requirements and
minimal benefits, as well as the resulting shift in managerial focus from
large scale, strategic issues to detailed reporting requirements. They
48. (SO 2, 5) Using an Internet search engine, determine who the
whistleblower was at Enron. Summarize the circumstances. What was
the relationship of this person with the company? Was this an internal
or external stakeholder? The whistleblower at Enron was Sherron
49. (SO 3, 8) Using an Internet search engine, search for the terms “guilty
as charged” + “California Micro Devices” in order to find an article
about the company, California Micro Devices. Identify the related
50. (SO 3, 8) There are five types of management earnings techniques
presented in this chapter. Provide two or three specific examples of
how corporate leaders could pull off these types of fraud, as well as the
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-11
• Early recognition of revenues, such as when management
loads the sales pipeline with customer transactions that will
recorded in the current period.
• Falsification of customers, such as when bogus customers are
created in the accounting records and bogus sales transactions
are developed to inflate the company’s revenues. Fictitious
supporting documents may be created to give the impression
of a legitimate transaction with a valid customer.
• Falsification of invoices or other records may occur in an
Cases
51. Do you think the tone at the top of organizations like Enron and
WorldCom led to their demise? In support of your answer, identify
specific actions of top managers at each of these companies. In order
to answer this question, you may wish perform research on the
conditions that brought these companies down. Student responses will
vary, but there is likely to be consensus on the issue of poor tone at
the top leading to a company’s demise. At Enron, there are multiple
Chapter 5 Solutions Corporate Governance and
the Sarbanes-Oxley Act
5-12
examples of unscrupulous actions of deception, including the creation
52. Through online research, locate a code of conduct for the top
management of a real world company. Discuss the importance of
each component of this code in terms of ethics and its relation to the
concept of corporate governance. Student responses will vary
significantly, as there are numerous examples that may be found