You are on page 1of 5

Corporate governance has become an important topic in practice and academic literature in recent years.

To ensure a competitive position, to attract capital, to ensure sustainability, and to combat corruption, companies from developing countries need to put in place good governance institutions. Corporate Governance is a mechanism developed to increase company
performance and managements behavior

The concept of corporate governance encountered many definitions. Depending on their perspective, different authors define this concept in different ways.

There are definition of CG : Corporate governance can be defined as the relationship among various participants in determining the direction and performance of corporations. The primary participants are (1) the shareholders, (2) the management, and (3) the board of directors (Monks and Minow, 2004). An even broader definition belongs to Zingales (1998). According to this author, corporate governance is the complex set of constraints that shape the ex post bargaining over the quasi rents generated by the firm. Cadbury Committee, 1992. Thus corporate governance was defined as the system by which companies are directed and controlled. The Australian Standard (2003) defines corporate governance as the process by which organizations are directed, controlled and held to account. This implies that corporate governance encompasses the authority, accountability, stewardship, leadership, direction and control exercised in the process of managing organizations. Since this definition recognizes the need for checks and balances in the process of managing organizations, it can be considered to be more comprehensive (Gregory, 2000).

In Indonesia, corporate governance defines as a set of rules that define the relationship between shareholders, managers, creditors, the government, employees and other internal

and external stakeholders in respect to their rights and responsibilities, or the system by which companies are directed and controlled (FCGI, 2001:20). The purpose of Corporate Governance is "to create added value for all interested parties (stakeholders)" According to Maruf (2006:15) The implementation of good corporate governance is expected to provide some of the following benefits: 1. Improve company performance through the creation process of making better decisions, improve operational efficiency and further improve services to stakeholders. 2. Easy in obtaining financing funds in order to increase a corporate value. 3. Give a trust for the investor in order to invest in Indonesia. 4. Shareholders will be satisfied with the performance of the company since at the same time will enhance shareholder value and dividends. Implementation of good corporate governance performed using principles that applicable internationally. These principles are expected to be a reference for the regulator (government) in build the framework for the implementation of good corporate governance. There are four essential elements of Corporate Governance elaborated by the OECD (Organization for Economic Co-operation and Development). The elements are: 1. Fairness. Ensuring the protection of shareholder rights, including the rights of minority and foreign shareholders, and ensuring the enforceability of contracts with resource providers. 2. Transparency. Requiring timely disclosure of adequate, clear and comparable information concerning corporate financial performance, corporate governance, and corporate ownership. 3. Accountability. Clarifying governance roles and responsibilities, and supporting voluntary efforts to ensure the alignment of managerial and shareholder interests, as monitored by the boards of directors (or board of commissioners in Two Tiers System, FCGI)

4. Responsibility. Ensuring corporate compliance with other laws and regulations that reflect the respective society's value. (OECD Business Sector Advisory Group on Corporate Governance, 1998) Board of ownership

Audit Committee
One of the aforementioned committees, the audit committee, has separate tasks in term of supervising and assisting the BoC in fulfilling its oversight responsibilities. For instance, the Audit Committee has the power to conduct or authorize investigation into matters within the committee's scope of responsibilities. The Institute of Internal Auditors (IIA) recommends that every public company have an audit committee organized as a standing committee. The Institute also encourages the establishment of audit committees in other organizations including not for profit and governmental bodies. The audit committee should consist solely commissioners who are independent, independent of management. The primary responsibilities of the audit committee should be assisting the BoC in carrying out their responsibilities as they relate to the organization's accounting policies, internal control and financial reporting practices. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee: Working Together Toward Common Goals) In general, audit committees exercises responsibility in three areas, namely: a. Financial Reporting. b. Corporate Governance. c. Corporate Control. a. Financial Reporting The responsibility of the Audit Committee in the area of financial reporting is to provide assurance that financial disclosures made by management reasonably portray the company's: 1. Financial Condition. 2. Results of Operations. 3. Plans and Long Term commitments. The specific steps involved in carrying out this responsibility include: 1. Recommending the external auditors. 2. Overseeing the external audit coverage, including: _ Auditor engagement letter _ Estimated fees _ Timing of auditors' visits _ Coordination with internal audit _ Monitoring audit results _ Review of auditors performance. 3. Reviewing accounting policies and policy decisions. 4. Examining the financial statements, including: _ Interim financial statements _ Annual financial statements _ Auditor's opinion and Management Letters . With respect to the review of accounting policies and policy decisions, a useful approach would be to require from the chief accounting officer a concise summary of all significant accounting policies

underlying the financial statements. This summary should be updated as necessary and reviewed by both the external and the internal auditors. b. Corporate Governance The responsibility of the Audit Committee in the area of corporate governance is to provide assurance that the corporation is in reasonable compliance with pertaining laws and regulation, is conducting its affairs ethically, and is maintaining effective controls against employee conflict of interest and fraud. The specific steps involved in carrying out this responsibility, include: 1. Reviewing corporate policies relating to compliance with laws and regulations, ethics, conflict of interest and the investigation of misconduct and fraud; 2. Reviewing current/pending litigation or regulatory proceedings bearing on corporate governance in which the corporation is a party; 3. Reviewing significant cases of employee conflict of interest, misconduct and fraud; 4. Requiring the internal auditor to report the scope of reviews of corporate governance and any significant finding. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee) c. Corporate Control The responsibility of audit committees for corporate control includes an understanding of the company's key financial reporting, risks areas and system of internal control. The committee should have an overview of the internal control framework through reports from internal audit. The scope of the internal audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance in carrying out assigned responsibilities. In addition, the new definition of internal auditing states that internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organization's operations and it helps an organization accomplish its objectives by bringing a systematic, discipline approach to evaluate and improve the effectiveness of risk management, control and governance processes. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee) d. Membership Moreover, further criteria and remarks concerning the audit committee are: at least one audit committee member should have sound financial and accounting knowledge chair of the audit committee should be present at Annual General Meeting to answer shareholder queries the audit committee should invite such executives as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee but on occasions it may also meet without the presence of any executives of the company. Finance director and head of internal audit and, when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee the Company Secretary should act as the secretary to the committee powers of the audit committee should include the following: o to investigate any activity within its terms of reference o to seek information from any employee o to obtain outside legal or other professional advice o to secure attendance of outsiders with relevant experience, if it considers necessary (Pratip Kar, 2000)

The role of the Audit Committee is to monitor and advise the BoC on the adequacy of control environment. But in some cases audit committee members may not have the expertise in matters of internal control, and some people serving on audit committees have very little accounting or financial background at all. Accordingly, audit committee members need a reference guide to their responsibilities. That is the function of an audit committee charter. The charter should articulate the authority, responsibility and structure of the audit committee. The responsibilities, at a minimum, should address financial and other reporting practices, internal control and

compliance with laws, regulations and ethics. The charter should also state that the audit committee will meet periodically and may call additional or special meetings as needed, if possible, the authority, responsibilities and structure of the audit committee should be provided in the governing law of the affected entity. The Audit Committee should be made up of individuals who are independent of the day to day management of the entity and who have the necessary skill experience to perform their review function effectively. One of the primary reasons for this independence is to ensure an unbiased perspective on reports and recommendations brought to the committee. Independent individuals would be more apt to be impartial and objective in such matters. The number of members on the Audit Committee should be determined by the size of the organization. Three to five members, however, is usually ideal. The audit committee will normally find it necessary to meet three to four times annually in order to fulfill its financial reporting responsibilities. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee)

Schleifer, A., and R. Vishny, 1997. A Survey of Corporate Governance. Journal of Finance (52), 737-783.

In this research, which are independent variable is managerial ownership, board of commissioners and audit committee. Whereas, the dependent variable earnings management. The purpose of good corporate governance is to create value added to all interested parties If good corporate governance of board ownership can work well, it gives an impact in businesses and also increase corporate accountability. Then the possibility of earnings management which can provide personal gain is very small so it can attract another investor to invest to its company. The role of the board of commissioners will also gives impact on earnings management because commissioners have responsible to overseeing balancing the rights in management.

You might also like