Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis 4 th session: Corporate Governance.

Apresentação em tema: "Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis 4 th session: Corporate Governance."— Transcrição da apresentação:

1 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis rireis@fcee.ucp.pt 4 th session: Corporate Governance and Financial accounting measures of performance Performance Evaluation IMSc in Business Administration October-November 2007

2 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 2/33 15/09/2014 Performance Evaluation  Corporate Governance Sarbanes-Oxley “Five years under the thumb” Auditing Profession  Financial Performance Measures Earnings per Share

3 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 3/33 15/09/2014 Performance Evaluation Sarbanes-Oxley  The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly 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.Enron Tyco InternationalPeregrine SystemsWorldCom

4 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 4/33 15/09/2014 Performance Evaluation TITLE I - “Public Company Accounting Oversight Board (PCAOB)”  PCAOB to provide independent oversight of public accounting firms providing audit services ("auditors"). It 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.

5 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 5/33 15/09/2014 Performance Evaluation TITLE II - “Auditors Independence”  Establishes standards for external auditor independence, to limit conflicts of interest. It also addresses new auditor 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.

6 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 6/33 15/09/2014 Performance Evaluation TITLE III - “Corporate Responsibility”  This title mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It enumerates specific limits on the 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.

7 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 7/33 15/09/2014 Performance Evaluation TITLE IV - “Enhanced Financial Disclosures”  Title IV describes enhanced reporting requirements for financial transactions, including off-balance sheet transactions, pro- forma figures and stock transactions of 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.

8 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 8/33 15/09/2014 Performance Evaluation TITLE V - “Analyst Conflicts of Interest”  Title V defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest.

9 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 9/33 15/09/2014 Performance Evaluation TITLE VI - “Commission Resources and Authority”  Title VI defines the SEC’s authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, adviser or dealer.

10 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 10/33 15/09/2014 Performance Evaluation TITLE VII - “Studies and Reports”  Title VII is concerned with conducting research for enforcing actions against violations by the SEC registrants (companies) and auditors.

11 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 11/33 15/09/2014 Performance Evaluation TITLE VIII - “Corporate and Criminal Fraud Accountability”  Title VIII is also referred to as the “Corporate and Criminal Fraud Act of 2002.” It describes specific criminal penalties for fraud by manipulation, destruction or alteration of financial records or other interference with investigations, while providing certain protections for whistle-blowers.

12 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 12/33 15/09/2014 Performance Evaluation TITLE IX - “White Collar Crime Penalty Enhancement”  This section is also called the “White Collar Crime Penalty Enhancement Act of 2002.” This section increases the 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.

13 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 13/33 15/09/2014 Performance Evaluation TITLE X - “Corporate Tax Returns”  Title X consists of one section, which states that the Chief Executive Officer should sign the company tax return.

14 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 14/33 15/09/2014 Performance Evaluation TITLE XI - “Corporate Fraud Accountability”  Also known as “Corporate Fraud Accountability Act of 2002”. It identifies corporate fraud and records tampering 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.

15 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 15/33 15/09/2014 Performance Evaluation The Certified Public Accountant and the Auditor’s Opinion  An audit is an examination of a company’s transactions and the resulting financial statements  The auditor’s opinion describes the scope and results of the audit and a judgment that the financial statements prepared by management are accurate

16 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 16/33 15/09/2014 Performance Evaluation Public Accounting Firms  The four largest public accounting firms are Deloitte Touche Tohmatsu Ernst & Young KPMG International PricewaterhouseCoopers  97% of the firms listed on the NYSE are clients of these four firms

17 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 17/33 15/09/2014 Performance Evaluation Public Accounting Firms  Each firm has annual billings in excess of $1 billion  All firms must follow generally accepted accounting principles (GAAP) The broad concepts and detailed practices of preparing and distributing financial statements

18 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 18/33 15/09/2014 Performance Evaluation Sarbanes-Oxley Act  Established the Public Company Accounting Oversight Board to regulate public accounting and to set standards for audit procedures through the issuance of generally accepted auditing standards (GAAS)  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

19 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 19/33 15/09/2014 Performance Evaluation Sarbanes-Oxley Act  Provides regulation of corporate governance Requiring boards to appoint an audit committee composed only of “independent” directors Requiring CEOs and chief financial officers (CFOs) to personally sign a statement certifying the appropriateness and fairness of their companies’ financial statements Increasing criminal penalties for knowingly misreporting financial information

20 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 20/33 15/09/2014 Performance Evaluation Professional Ethics  Members of the AICPA must abide by a code of professional conduct  The Institute of Management Accountants has a code of ethics for management accounts  Auditors and management accountants have professional responsibilities concerning competence, confidentiality, integrity, and objectivity

21 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 21/33 15/09/2014 Performance Evaluation Professional Ethics  Ethical standards are personal and depend on the values of the individual  A successful manager must recognize the ethical dimensions of a situation and act with absolute integrity

22 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 22/33 15/09/2014 Performance Evaluation Professional Ethics  Despite the criticism of accounting ethics, accountants were responsible for revealing the problems in many of the recent corporate scandals  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 )Cynthia CooperWorldcomSherron WatkinsEnron

23 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 23/33 15/09/2014 Performance Evaluation

24 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis rireis@fcee.ucp.pt Financial accounting measures of performance Computing Earnings per Share (EPS)

25 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 25/33 15/09/2014 Performance Evaluation Computing Earnings per Share (EPS) Earnings per share indicates the income earned by each share of common stock. Reported at the end of the income statement Should report intermediate components as well.

26 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 26/33 15/09/2014 Performance Evaluation EPS on Simple Capital Structure  Simple Capital Structure means that there is only common stock and there is no potential common stock (securities that can potentially be converted into common stock and dilute EPS). EPS= Net Income Weighted Average Number of Shares

27 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 27/33 15/09/2014 Performance Evaluation Preferred Stock Dividends  Preferred Stock Dividends are compensation not available for common stockholders, therefore they are subtracted from the Net Income. EPS= Net Income – Preferred Dividends Weighted Average Number of Common Stock

28 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 28/33 15/09/2014 Performance Evaluation Weighted Average Number od Shares Outstanding  Weighted by the fraction of the period they are outstanding  Find the equivalent number of whole shares outstanding for the year.

29 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 29/33 15/09/2014 Performance Evaluation Stock Dividends and Stock Splits  When these happen computation of the average number of shares outstanding needs to be redone.  A stock dividend or split does not change the shareholders’ total investment.

30 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 30/33 15/09/2014 Performance Evaluation Complex Capital Structure  Dilutive securities are securities that can be converted into common stock (through conversion or exercise) and will dilute earnings per share.

31 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 31/33 15/09/2014 Performance Evaluation Diluted EPS Note that: Only dilutive securities are to be reported! Antidilutive are not considered. EPS= Net income- Preferred dividends - Impact of Convertibles - Impact of Option, Warrants, and Other Dilutive Securities Weighted Average Shares Outstanding

32 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 32/33 15/09/2014 Performance Evaluation Diluted EPS – Convertible Securities If-Converted Method 1. Conversion of the convertible securities as soon as possible (beginning of period or issuance) 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.

33 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 04 - 33/33 15/09/2014 Performance Evaluation Diluted EPS – Options and Warrants Treasury Stock Method 1. Exercise of options or warrants as soon as possible (beginning of period or issuance) 2. Proceeds from the exercise are used to purchase common stock.