Chapter 12: Technology and Corporate Governance

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Chapter 12Technology and Corporate Governance

• L. Murphy Smith
• Texas AM University

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Chapter 12 Technology and Corporate Governance
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.
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Chapter 12 Technology and Corporate Governance
Information Technology (IT) 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. Teamwork RQ4 What is information
infrastructure? Explain how it is influenced by
the board of directors and top management.
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Chapter 12 Technology and Corporate Governance
XBRL 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.
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Chapter 12 Technology and Corporate Governance

• Information Technology (IT)
• The full and effective use of IT may shape and
  improve corporate governance functions. A
  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)
• Teamwork RQ2 How do public companies benefit
  from electronic communication? How do
  shareholders benefit from electronic
  communication?

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Chapter 12 Technology and Corporate Governance

• 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.
• Teamwork DQ1 Discuss the impact that the
  Internet, globalization, and regulations are
  having on corporate governance reforms.

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Chapter 12 Technology and Corporate Governance

• XBRL
• 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

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Chapter 12 Technology and Corporate Governance
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
clients 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.
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Chapter 12 Technology and Corporate Governance
Continuous Auditing 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.
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Chapter 12 Technology and Corporate Governance
Summary 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.
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Chapter 12 Technology and Corporate Governance
Summary -- Continued 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 clients 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