Question

The audit committee of the board of directors

a. is usually chaired by the CFO.
b. conducts testing of controls on behalf of the external auditors.
c. provides a check and balance on management.
d. all of the above.

Answer 1

Corporate governance involves the board of directors, auditing firms, and outside investors, with the goal of ensuring transparency and accountability in a firm's operations. The failure of these governance mechanisms at Lehman Brothers resulted in a lack of accurate financial information for investors. This case underlines the importance of strong governance to maintain financial integrity.

Step-by-step explanation:

Corporate Governance in the Context of Lehman Brothers

The concept of corporate governance refers to the mechanisms, processes, and relations by which corporations are directed and controlled. The board of directors plays a vital role in ensuring that the firm operates in the best interests of its shareholders, which is often referred to as the first line of this corporate governance. Despite this oversight, there can be significant issues, as evidenced by the failure of corporate governance in the case of Lehman Brothers, where the governance structure did not provide investors with accurate financial information about the company's operations.

Corporate governance also involves the auditing firm hired by the company, which should independent review the company's financial records and assert their reasonableness. Additionally, outside investors, particularly large shareholders like mutual funds and pension funds, serve as a key force in governing corporate behavior. Unfortunately, these institutions may not always function effectively, leading to corporate missteps and financial misrepresentations that can have far-reaching consequences.

Although the top executives have a substantial influence in nominating board members, theoretically, the board's duty is to align with shareholders' interests. Nevertheless, such dynamics may lead to conflicts of interest and governance lapses, which were starkly displayed in the downfall of Lehman Brothers. These events highlight the imperative for robust corporate governance structures to uphold the integrity of financial information and protect investors.