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Several provisions of SOX directly or indirectly affect executive compensation packages, including (1) prohibition of personal loans to directors and executives, (2) reporting insider trading, (3) insider trading during pension fund blackout periods, and (4) forfeiture of certain bonuses and profits.

Two provisions of SOX pertain to management certifications of financial reports. Section 302 of SOX requires the principle executive and financial officers of the company to certify each periodic report filed with the SEC. Under Section 906 of SOX, each periodic report containing financial statements filed by a reporting company must be accompanied by certification of the CEO and CFO of the company.

Earnings management is defined as a managerial discretionary practice of timing strategic and operating decisions or choosing accrual estimates to manage short-term earnings. Any illegitimate earnings management can cause financial restatements.

A high-quality financial report is defined in this book as a financial report that is relevant, useful, reliable, and transparent.

Financial information is considered transparent when it provides shareholders and other stakeholders a clear understanding of the company’s KPIs.

Conclusion

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