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Chapter Two

Corporate Governance
Perspectives

Training Aim
To present a brief introduction to corporate
governance as the context for the internal
audit role that will give you an initial
understanding of:
1.The agency model of accountability.
2.The components of corporate
governance.

YOUR CHOICE
Corporate governance is really about:
1. The way performance is reported to
shareholders.
2.

The way compliance is managed.

3. The way organizations are directed and


controlled.

YOUR CHOICE ANSWERED


Corporate governance is really about:
1. The way performance is reported to
shareholders.
2.

The way compliance is managed.

3. The way organizations are directed and


controlled.

Agency model: Basic

Board of
Directors

Managers

Supervisors
Operational and Front Line
Staf

SHAREHOLDE
RS
Board of
Directors

KPIs
key performance indicators

KPIs
Managers

Supervisors
Operational and Front Line
Staf

PERFORMANC
E
Objectives

STAKEHOLDE
RS
ACCOUNTABILITY
Board of
Directors
KPIs

Policies
Strategies

Managers

Plans

Performance Review
Final Accounts

Procedures
Training &
Development

Directors Report

A/c Policies
Supervisors
Operational and Front Line
Staf

Corp Gov Disclosures


S.I.C.

A short Task

What makes for a good published


annual report?

A short Task Answered


Focused; Highlight important messages,
transactions and accounting policies and
avoid distracting readers with immaterial
clutter.
Open and honest; Provide a balanced
explanation of the results the good news
and the bad.
Clear and understandable: Use plain
language, only well defined technical
terms, consistent terminology and an
easy-to-follow structure.

Financial Accounts
If the accounts do not show a true
and fair view that reflects all realised
losses then dividends may be paid
out to the shareholders that
diminishes the funds that are left for
the creditors.

Legislation, Rules & Regs

CONFORMANC
E

STAKEHOLDE
RS
Board of
PERFORMANC
Directors

Final Accounts

ACCOUNTABILITY

Objectives
Policies

KPIs
Directors Report
Managers

Strategies

Final Accounts

Plans
Procedures
Training &
Development

Performance Review
A/c Policies

Supervisors

Corp Gov Disclosures


S. I. C.

Operational and Front Line


Staf
Ethical Standards

A short Task

What could go wrong even with the


governance model we have
established so far?

What could go wrong?

Boards dominated by a powerful chief executive


officer (CEO).
Boards that are inefectual and consist simply of a
network of friends.
Boards that are incompetent and or who are overcommitted.
CEOs and chief finance officers (CFO) who conspire
with other board members to distort the published
results.
Compensation schemes which encourage high
rewards for excessive short-term risk taking based
on huge bonuses.
Employees who are regularly able to abuse
company resources and exploit loopholes.
Short-term measures such as dumping waste or

What could go wrong?


BCCI
Barings Bank
Daiwa Bank.
Equitable Life.
Enron.
WorldCom.
Madof.
Parmalat.
Lehman Brothers.
Northern Rock.

Key Principles BY OECD:


1.Rights of shareholders. CG framework should protect
shareholders rights.
2.The equitable treatment of shareholders. CG framework
should ensure the equitable treatment of all shareholders, including
minority and foreign shareholders.
3.The role of stakeholders in corporate governance. CG
framework should ensure that timely and accurate disclosure is made
of all material matters regarding the corporation, including the
financial situation, performance, ownership and governance of the
company.
4.Disclosure and transparency. CG framework should ensure that
timely and accurate disclosure is made on all material matters
regarding the corporation.

External audit
The external auditor seeks to test the
underlying transactions that form the basis
of the financial statements. In this way they
may form an opinion on whether or not
these statements show a true and fair view.
Reliance may be placed on those systems
that produce the accounts so that less
testing will be necessary where the system
is found to be sound. The systems are,
however, perceived as a short-cut to

The Audit Committee


An audit committee will be established by the main board to perform
those duties that the board decides should be properly allocated to
this specialist forum such as:
Ensuring that financial statements are understandable, transparent,
and reliable.
Ensuring the risk management process is comprehensive and ongoing
Helping achieve an organization-wide commitment to strong and
efective controls.
Reviewing corporate policies relating to compliance with laws and
regulations, ethics, conflicts of interest, and the investigation of
misconduct and fraud.
Reviewing current and pending corporate governance-related
litigation or regulatory proceedings to which the organization is party.
Continually communicating with senior management regarding status,
progress, and new developments, as well as problematic areas.
Ensuring the internal auditors have access to the audit committee and
encouraging communication beyond scheduled committee meetings.
Reviewing internal audit plans, reports, and significant findings.

Corporate Governance Codes

Internal Corporate Structures


Control
Framewo
Disclosure Arrangements
rk
Risk
Internal
Managem
Controls
ent
Corporate
Strategies &
Review

Corporate
Governance Codes

Internal
Control Corporate Structures
Framewo
rk
Disclosure
Risk Arrangements
Internal
Managem
Controls
ent
Corporate
Strategies &
Review

Principle 1: The boards fundamental objective should be to


build long-term sustainable growth in shareholder value for the
corporation, and the board is accountable to shareholders for its
performance in achieving this objective.
Principle 2: While the boards responsibility for corporate
governance has long been established, the critical role of
management in establishing proper corporate governance has
not been sufficiently recognized. The Commission believes that
a key aspect of successful governance depends upon successful
management of the company, as management has primary
responsibility for creating an environment in which a culture of
performance with integrity can flourish.

Principle 3: Shareholders have the right, a responsibility and a


long-term economic interest to vote their shares in a thoughtful
manner, in recognition of the fact that voting decisions influence
director behavior, corporate governance and conduct, and that
voting decisions are one of the primary means of
communicating with companies on issues of concern.
Principle 4: Good corporate governance should be integrated
with the companys business strategy and objectives and should
not be viewed simply as a compliance obligation separate from
the companys long-term business prospects.

Principle 5: Legislation and agency rule-making are


important to establish the basic tenets of corporate
governance and ensure the efficiency of our markets.
Beyond these fundamental principles, however, the
Commission has a preference for market-based
governance solutions whenever possible.
Principle 6: Good corporate governance includes
transparency for corporations and investors, sound
disclosure policies and communication beyond disclosure
through dialogue and engagement as necessary and
appropriate.

Principle 7: While independence and objectivity are necessary


attributes of board members, companies must also strike the
right balance between the appointment of independent and
non-independent directors to ensure that there is an appropriate
range and mix of expertise, diversity and knowledge on the
board.
Principle 8: The Commission recognizes the influence that
proxy advisory firms have on the market, and believes that such
firms should be held to appropriate standards of transparency
and accountability. The Commission commends the SEC for its
issuance of the Concept Release on the U.S. Proxy System,
which includes inviting comments on how such firms should be

Principle 9: The SEC should work with the NYSE and other
exchanges to ease the burden of proxy voting and
communication while encouraging greater participation by
individual investors in the proxy voting process.
Principle 10: The SEC and/or the NYSE should consider a wide
range of views to determine the impact of major corporate
governance reforms on corporate performance over the last
decade. The SEC and/or the NYSE should also periodically
assess the impact of major corporate governance reforms on
the promotion of sustainable, long-term corporate growth and
sustained profitability.

A short Task

Where does Internal auditing fit into


the governance equation?

Legislation, Rules &

STAKEHOLDE
Regs
RS

Final Accounts

External Audit

ag
e
M
an

systems of
internal control

Performance Review
Final Accounts

Supervisors
Performance Management
Operational and Front Line
Staf
Ethical Standards
COMMMITMENT AND CAPABILITY

Training &
Development

Ri
sk

Procedures

Managers

n
iti
ud

Plans

Directors Report
A
al

Strategies

KPIs

n
er

Policies

Audit Committee
t
In

m
en

Objectives

ACCOUNTABILITY

Board of
PERFORMANC
Directors

CONFORMANC
E

A/c Policies
Corp Gov Disclosures
S. I. C.

Legislation, Rules &

STAKEHOLDE
Regs
RS

Final Accounts

External Audit

Board of
PERFORMANC
Directors

CONFORMANC
E

Training &
Development

m
en
M
an
ag
e
Ri
sk

Procedures

Directors Report

Managers
systems of
internal control
Supervisors

ng
iti
ud

Plans

KPIs
lA
na
er

Strategies

Audit Committee
t
In

Policies

Objectives

ACCOUNTABILITY

Performance Management
Operational and Front Line
Staf
Ethical Standards
COMMMITMENT AND CAPABILITY

Performance Review
Final Accounts
A/c Policies
Corp Gov Disclosures
S. I. C.

SHAREHOLDERS AND THE BOARD


Challengi
Minorit
Stewards
Risk
ng
y
hip role
appetit
questions
rights
e
Voting
Risk
Annual SHAREHOLDERS
rights
and
report
control
s
Code
Agend
Long
of
a and
versus
ethics
minute
short
Successio
s
THE
term
n
goals Appointme
planning
BOARD
nts policy
Remunerat
Balanc
Non
ion policy
Chair
ed
Assura
executiv
and
scorec
nce
es
CEO
ard
routine
director
role
s
s
split

GOVERNANCE
THE PUBLIC SECTOR VERSUS THE
PRIVATE SECTOR

The private sector is engaged in a constant


struggle to gain and hold the trust of society;
to represent the acceptable face of capitalism.
Meanwhile, the need to maintain public
confidence in the corporate sector and
credibility in government and not-for-profit
sectors has never been stronger. There are
calls from all quarters to maintain this
pressure to improve, develop and progress
corporate governance arrangements as far as
possible. The internal audit task of reviewing
the governance process sets a tremendous