Contemporary Issues in Business Ethics and Corporate Governance

1. Contemporary Issues in Business Ethics and Corporate Governance Chapter XII

2. Chapter Objectives: • Address the broad influence of technology in twenty-first-century corporate governance • Introduce a theoretical “cybercompany model” to promote the use of information technology in areas of shareholder communication, electronic commerce, electronic financial reporting, and continuous auditing. • Recognize the factors that help build a firm information infrastructure. • Present electronic financial reporting using XBRL format. • Discuss continuous auditing.

3. Key Terms Chief information officer (CIO) Continuous auditing Cybercompany model Digital economy E-commerce Electronic Data Gathering, Analysis, and Retrieval (EDGAR) EXtensible Business Reporting Language (XBRL) EXtensible Markup Language (XML) Financial Reporting and Auditing Agent with New Knowledge (FRAANK) Information infrastructure Reporting independence System independence Taxonomy

4. Information Technology IT can play an important role in corporate governance as a tool to improve the efficiency and effectiveness of corporate governance. The CIO or IT manager is responsible for management and operation of the IT function to support other corporate governance functions. Compliance with Sections 404 (real-time disclosures) and 802 (criminal penalties for altering documents) of SOX necessitates the use of IT solutions for timely access to secure and complete business documents.

5. Electronic Disclosure The SEC has recently accepted, on a voluntary basis, filing of financial reports in XBRL format, along with statutory filings under the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

6. Cybercompany Model The full and effective use of IT may shape and improve corporate governance functions. Cybercompany may consist of the following elements: Electronic Communication with Shareholders. Shareholder voting can be done electronically by using the same technologies used in local and national elections.it is expected that in the future, the majority, if not all, of companies’ communications will be conducted in electronic form. Electronic Commerce. E-commerce has had profound implications for corporate governance and raised several policy, legal, and business issues that need to be addressed. Electronic financial reporting. (will be discussed in the next slide)

7. Electronic financial reporting High-quality financial information can be produced only under effective accounting and internal control systems guided by sound accounting practices and audited by competent and independent auditors. Information infrastructure. Information infrastructure determines the way financial information is generated, processed, analyzed, audited, and used in making business and investment decisions. Internal controls. Timely compliance with provisions of SOX, particularly Sections 302, 404, 409, and 802, requires companies to use their IT resources or obtain IT solutions required to access and process the data. Information security. Although SOX does not explicitly address information security, Sections 302 and 404, along with related SEC implementation rules, require management to assess and document IT controls, including information security, to ensure the reliability of financial statements.

8. Extensible Business Reporting Language XBRL is an XML-based (Extensible Markup Language) platform for the analysis, exchange, and reporting of financial information with the purpose of integrating business reports and technology solutions. The standardized XBRL format allows all market and corporate governance participants to electronically share financial information to the extent that investors have access to the same information as analysts. The XBRL tags are prepared according to applicable taxonomies such as GAAP for financial reporting, tax rules for tax purposes, or specific regulatory definitions for regulatory filings. XBRL makes it easier to generate, compile, validate, and analyze business and financial information

9. XBRL Costs and Benefits of XBRL Adopting XBRL might be a significant investment, but XBRL provides cost savings through usage. Not only are the primary users finding benefits through XBRL, but secondary users such as investors will be able to search and locate information in a more timely fashion. XBRL Application The SEC, in September 2004, proposed a voluntary plan for all public companies to submit their financial statements using XBRL beginning with the 2004 calendar year-end report filings. The first mandatory e-filing using XBRL format is now implemented under the call report modernization project for about 8,400 financial institutions. Future of XBRL XBRL is expected to substantially reduce manual effort in the preparation of financial statements, strengthen ICFR, improve financial statement comparability, and level the playing field for investors to gain access to real-time, online financial information.

10. Continuous Auditing Continuous auditing is defined as “a comprehensive electronic audit process that enables auditors to provide some degree of assurance on continuous information simultaneously with, or shortly after, the disclosure of the information”. Continuous auditing enables the following benefits: 1. Reduction of the cost of an audit engagement by enabling auditors to test a larger sample of client’s transactions 2. Reduction of the amount of audit resources needed to manually perform tests of controls and substantive tests 3. Increase in the quality of financial statement audits by allowing auditors to use the integrated audit approach of understanding the entity-level control environment 4. Specification of transaction selection criteria to choose transactions or transaction cycles and perform integrated audit.

11. Technology Solutions Among the recently developed technology solutions is business assurance analytics software designed by ACL Services Ltd. to alert company executives when questionable transactions occur. Analytics software continuously monitors business activities, drawing attention to any suspicious or fraudulent activities.

12. Conclusion • IT can play an important role in corporate governance as a tool to improve the efficiency and effectiveness of corporate governance. • The cybercompany model presented in this chapter is characterized by (1) electronic communication with shareholders, (2) e-commerce, (3) electronic financial reporting, and (4) electronic continuous auditing. • E-commerce has become an integral component of business strategies and has altered the way organizations conduct their daily operations. The business framework has transformed from “brick-and-mortar” to a “brick-and-click” infrastructure. • XBRL enables business reporting information to be transferred automatically between different computer platforms and applications. XBRL allows the selection, analysis, storage, and exchange of tagged data that can be automatically displayed in various formats.

13. Conclusion • The SEC XBRL program, as of now, is a voluntary program giving opportunities to public companies to participate in the program and start, as well as stop, their participation as they desire. The SEC strongly encourages companies to participate in the voluntary filing program and submit XBRL documents on EDGAR. • XBRL-GL is expected to provide the following advantages: reporting independence, system independence, consolidation, and flexibility. • Continuous auditing can offer the following benefits: Reduction of the cost of an audit engagement by enabling auditors to test a larger sample of client’s transactions. Reduction of the amount of audit resources needed to manually perform tests of controls and substantive tests Increase in the quality of financial statement audits. Specification of transaction selection criteria to choose transactions or transaction cycles and perform integrated audits