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Student ID: 1207412

December 13, 2013

FACULTY OF WELL-BEING & SOCIAL SCIENCES (Accountancy and Law)

ACC 3010 Advance Auditing November 2013 Semester


Assignment

Student ID : Program enrolled : Submission date : Lecturer :

1207412 Bachelor (Hons) in Accountancy 13/12/2013 Gill Baker

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Student ID: 1207412

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Table of Contents

Introduction ..................................................................................................................................... 4 Corporate Governance .................................................................................................................... 7 Shareholders in corporate Governance & their significance .......................................................... 8 Principles of effective Corporate Governance ................................................................................ 9 Conclusion .................................................................................................................................... 12 Reference ...................................................................................................................................... 13

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Student ID: 1207412

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Student ID: 1207412

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0.1 Introduction
Corporate government is one of those concepts that are considered extremely important in United Kingdom. For any organization to sustain its position in the long run and achieve considerable profits it is important to practice corporate governance in its operations particularly. It is because of this reason that United Kingdom has been seen highlighting the importance and standards for corporate governance repeatedly (Zabihollah, 2002). Oblige or justify was the central idea behind the corporate governance of UK when it first showed its existence back in 1992. Corporate governance has been defined as "Corporate governance is the system by which businesses are directed and controlled." (Cadbury Committee, 1992) This concept of corporate governance centralize and represents all the major day to day operations that demand effective monitoring such as scheduling the board, managing the board members and settling their issues, risk assessment and dealing with it, compensation plan of the employees and the relationship that exist between the shareholders can also be handled through this concept (Thomson, 2009). For every organization it is important to have a set code of conduct and it should be implied on all the workers to abide on these code religiously. The shareholders of the organizations are responsible to provide explanation if the conduct of the organization and its employees are not up to the satisfactory level set by the organization for itself. In case of unjustified explanation of the act the shareholders have this authority to hire competent employees removing the previous inefficient directors. This is not an easy job however, as the shareholders are required to determine these code of conducts and make sure that each of their employees are not just well aware with them but are also

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trained in such a manner that they follow these line of actions (Thomson, 2009). Furthermore, it is the responsibility of shareholders to continuously observe the performance of their employees and analyze each step carefully to ensure that none of the procedures are against the companys code of conduct. All this is necessary to strengthen the companys operation, maintaining the standards along with achieving profits through it. Along with it this makes the shareholder of the company involved with the operations developing a sense of belonging in them (Anstee, 2010). As explained earlier the corporate governance in UK introduced the oblige or justify statement that has been adopted and implanted by Cadbury (1999) as well in their organization. They ensure the successful implementation of the code of conducts in order to achieve their objectives they have maintained for their organization and they make sure that by no means their line of actions violates these codes. The reason behind setting high goals for oneself is simply because it has been observed that those organizations that prepares a high target for themselves eventually manages to achieve them as well. They faces difficulties and hardship but still they conquer their goals better than those organization that has no code of conduct set for themselves. Furthermore, as these code are designed by the shareholder of the company hence, they are in benefit for the organization and makes them responsible as well for any good or bad performance taking place at the firm. Due to the fluctuating and dynamic corporate market the corporate governance code keeps modifying on regular basis (Jones and Pollitt, 2001). Earlier the corporate governance of UK was not satisfactory enough and a lot of speculations were made due to the trouble caused by the inefficient governance system

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Student ID: 1207412

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of the country. It is the era of early 90s that precisely the year of 1992 that UK underwent many significant changes and their corporate culture changed majorly. All these changes were mentioned and broadly highlighted in the report presented by Cadbury by the end of that year emphasizing particularly on the structure of the organization along with the trouble this countrys organization had to face concerning their reporting, compensation plan and appointment in the company (Clarke, 1993). The reason behind such high level of commotions and disturbance were the mere fact that the corporate governance of other countries were far satisfactory, productive and profitable than the corporate governance code being practiced at UK. There was a noticeable lag in this regard and hence, it was unavoidable to ignore it (Napier, 1992). The shareholders or the committee members back then felt the need of coming up with some strategies and revising the code of conduct to rule out these issues that they had been facing all along. This realization came to them because of the report presented by Cadbury in 1992. Through this report the committee members made the conclusion that the reason behind this lag was the lack of confidence shown by the committee towards the financial department particularly the auditors and financial supervisors. Apart from that the in availability of proper control structure, supervisors accessing the business risks, poor accounting standards, immense pressure of competition because of the string competitors along with this pressure putting damaging impact on the auditors are some of the major issues effecting the successful implementation of the corporate governance code (Cadbury, 1992).

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Student ID: 1207412

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0.1 Corporate Governance


The code of conduct, values, procedures, and ways of operating on daily basis are all explained in the corporate governance code of that company (Thomson, 2009). According to Thomson (2009) these code of conduct must not be there just to ensure that the operations are running smoothly and no harm is done to the companys image by any conduct of the company but these conducts must also determine that these codes also benefits the stakeholders of the company and by no mean bring any harm to them. These governance rules must be for the benefit of both the organization and its employees. They must be developed in such a manner that it efficiently satisfies the vision and objectives of the firm and all the members of the organization gets facilitated from it. It is the responsibility of the management to ensure that they serve their employees right and practices only those policies and conduct that benefit each and every person associated with the organization. According to Calder (2008) if the organization has been practicing good and efficient governance rules then it has been observed that it benefits the share prices immensely and brings a huge rise in them. This eventually brings a lot of benefit to the company as because of the increasing share prices the interest of investors also gets higher and they start showing more interest in the companys operation. However, these governance rules cannot be generalized as each organization has its own set of goals that they wish to achieve and these governance rules must be in alignment to those objectives. Hence, it must be designed by the shareholders of the organization specifically as they are aware with their objectives and complexities as well. Furthermore, the generalization is also not possible because of the difference in

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industry and country from one another. For each country there are different codes depending upon its culture and working environment.

2.0.1 Shareholders in corporate Governance & their significance


Any big investor would never invest in an organization without reviewing its corporate governance codes. Hence, it could be rightly said that the role of these codes are extremely crucial for attracting new investors for the company. It has been stated by Hingley (2013) that corporate governance has a higher impact on different departments of an organization and it is because of the success of these departments that shareholders gets compelled to invest in the company. However, despite all these apparent information any mishap or lagging must be mentioned to the shareholders beforehand. Due to the huge amount that the investor has been willing to invest in the organization, the management is obliged to prepare them for any difficulties known. Moreover, the shareholder also has the right to remove the firm if they do not think him capable enough to understand the complexities of the responsibility assigned to them along with hiring all the competent individuals for such a professional and significant task of developing the governance code and implementing on them. It has been further stated by Hingley (2013) that the importance of shareholder should be made apparent by communicating every detail of the company with them and making sure that they remain connected with one another. As the employees of the organization are the one doing all the hard work hence, the must be a genuine benefit plans for the employees and the code of conduct must be developed considering their needs as well.

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Student ID: 1207412

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3.0 Principles of effective Corporate Governance


Developing leadership quality among the higher management is one of the most strong principle of corporate governance. As stated by Anstee (2010) the effectiveness of these code depends strongly on the principles mentioned below as those organization that have a strong management develops a strong working environment that works in accordance with the goals and objectives of the firm. Through these principles successful running of the business become easier and it has been observed that those organizations manages to achieve their objective easily and hence satisfies the long term goal of the company eventually. This becomes possible only when the vision for the organization is clear and is known to all and each and every member of the organization is striving to achieve that vision specifically. The role and responsibility of each member must be evident and each employees must exercise their role effectively. Moreover, the role of board members must not be limited just to making decision but a division of responsibility must sustain in them as well. Each member must be hired as per their abilities and no biasness shall be allowed in this regard from the shareholders end. The sole reason behind their hiring should be their qualification and capabilities. Below are some of the major principles of effective corporate governance that must be induced in an organization: I. Leadership:

For any organization to operate success and achieve long term stability it is necessary that it maintains a strong board of directors for their organization. These board members must be strong in their domains and should have an ample amount of leadership quality as their featuring traits. Effective board ensures an effective running of an organization.
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Each member of the board must be well aware with their responsibilities. Moreover, none of the members have the authority to take a decision without consulting their fellow board members. Each and every decision must be for the benefit of the company and should be taken with the mutual consent of all the members. The board should be managed by one head commonly known as the chairman of the board and company. That chairman is appointment mutually by the other board members or is the owner of the company and is accountable for the effectiveness eventually (Financial Reporting Council, 2012). II. Efficiency:

The allotting of duties and task must be done considering the capabilities and skills of an individuals carefully. It is the responsibility of the board membe rs to perform their responsibilities efficiently and ensure that the subordinates below them are performing their tasks with complete dedication and to the best of their abilities. Board should set some standard rules and procedures that must be followed while hiring any new member for the board. Moreover, when a task is assigned to any director he must be provided with ample time to fulfill his responsibilities. After the completion each task must be assessed and proper monitoring must be done in order to ensure that the completion is done as per the standard and objectives of the organization. Moreover, it also helps in determining the performance of each director by this specifically (Tricker and Tricker, 2012). III. Responsibility:

The responsibility of each and every task comes down on the board of directors. With authority there comes responsibility and hence, it is the job of whole team of directors to

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evaluate the performance of their organization on regular basis. Reports must be developed presenting the performance of each division and the steps that has been taken by the directors to ensure the sustainability in the performance. Risk management training must be provided to the employees so that the company is always well prepared at time of any risk surrounding it (Solomon, 2011).

IV.

Compensation plan:

Compensation plan for any organization must be such that it should be adequate enough to retain the employees but not unnecessarily extravagant. It should be moderate enough particularly the directors of the company must be hired on a worthy package. This is significant to facilitate a healthy working environment with satisfied employees. Rewarding of employees and appreciating their work must be done on time to time basis. This develops a sense of recognition among them. Moreover, the package determination must be done following a procedure so that none of the director feels unjustified and let down with the compensation plan of the company (Financial Reporting Council, 2012). V. Association that exist with the shareholders:

The association among the shareholder and the director must be a pleasant one. The shareholders must be involved completely in all the important decisions of the company particularly the objectives and goals of the company must be set with mutual consent and complete involvement of the shareholders. This is the responsibility of the management to ensure that their shareholders always feel engaged and involve with the organization. This can be done by organizing various meetings, conferences, dinners etc (Financial Reporting Council, 2012).
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Student ID: 1207412

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4.0 Conclusion
For ensuring successful and productive operations it is necessary to exercise efficient corporate governance in the organization. Efficient corporate governance is necessary for almost every country that promotes trade and has to maintain a stronger image in international market. This code of conduct being practiced within the country will eventually help in creating a name globally. The role of directors in this code of conduct is extremely crucial and it is their responsibility to ensure that these conducts are perfectly designed considering the objectives of the company and should monitor them on continuous basis. It has been observed that there are few principles of effective corporate governance that must be exercised to achieve better outcomes. These principles are leadership, efficiency, responsibility, association with the shareholders and compensation plan.

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Student ID: 1207412

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Reference
Anstee, N. (2010) Financial reporting council: the UK approach to Corporate Governance [Online] Available from <http://www.frc.org.uk/OurWork/Publications/Corporate-Governance/The-UK-Approach-to-CorporateGovernance.aspx> [Accessed on 25th Nov, 013] Cadbury, A. (1992) The Financial Aspects of Corporate Governance, The Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd. Calder, A. (2008) Corporate Governance: A practical guide to the legal frameworks and international codes of practice. McGraw hills, P. 208 Clarke, T. (1993) Corporate Governance: The State of the Art.Managerial Auditing Journal, 8(3), 3-7. Hingley, R. (2012) Improving Corporate Governance and Shareholders engagement [Online] Available from <https://www.abi.org.uk/News/Newsupdates/2013/07/~/media/2492136445D547CD88F369756481E14A.ashx> [Accessed on 25th Nov, 013] IFC (2010) Corporate Governance Success Stories. International Finance Corporation. Jones, I.W. and Pollitt, M.G. (2001) Who influences debates in business ethics? An investigation into the development of corporate governance in the UK since 1990.ESRC Centre for Business Research, University of Cambridge, Working Paper No. 221. Napier, C. (1992)The Unaccountable Robert Maxwell. Accountancy, 109(1182), 25-26. Solomon, J. (2011) Corporate Governance and Accountability, John Wiley and Sons. Thomson, L.M. (2009) What is Corporate Governance? [Online] Available from <http://articles.economictimes.indiatimes.com/2009-0118/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyamfounder> [Accessed on 25th Nov, 013] Tricker, B. and Tricker, R. (2012) Corporate Governance: Principles, Policies and Practices, Oxford University Press.

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Zabihollah, R. (2002). Financial Statement Fraud. Wiley and Sons.

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