ETHICS AND CORPORATE GOVERNANCE

GROUP PRESENTATION

AUDITORS AND AUDITS

NORHAYATI M LUI CGA 080021

JAYAKUMAR SALLIAH CGA 070127
MOHD ZIA CGA 070040
AZMAN IBRAHIM CGA 060021
JOEHARY SULAIMAN CGA 040189

CSGB6102 ETHICS AND CORPORATE GOVERNANCE

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 PRESENTATION OUTLINE

•ROLE OF AUDITING AND AUDITORS IN CORPORATE GOVERNANCE

•AUDIT AND AUDITOR
•MALAYSIAN CODE OF CORPORATE GOVERNANCE
•CORPORATE GOVERNANCE PRACTICES
•CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (IFAC Code)
•THE LEGAL ENVIRONMENT
•CASE REFERENCES
•FUTURE OF AUDIT
•CONCLUSION
•OPEN THE FLOOR FOR OTHER OPINION

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 ROLE OF AUDITING AND AUDITORS IN
CORPORATE GOVERNANCE
ZIA

Understanding Corporate Governance

•Corporate governance is the set of processes, customs, policies, laws and
institutions affecting the way a corporation is directed, administered or controlled. It
includes the relationships among the many stakeholders involved and the goals for
which the corporation is governed

•The principal stakeholders are the shareholders, management and the board of
directors, along with other stakeholders like employees, suppliers, customers, banks
and other lenders, regulators, and the community at large

•Key elements of good corporate governance principles include honesty, trust and
integrity, openness, performance orientation, responsibility and accountability,
mutual respect, and commitment to the organization.

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 STAKEHOLDERS OF CORPORATE GOVERNENCE

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 ROLE OF AUDIT COMMITTEE

• An effective Audit Committee is a vital component of an effective

corporate governance system
• The Audit Committee and the Auditors need to maintain an ongoing
dialogue independent of management and the the Board of
Directors
• Audit Committee members must have “Financial Compitence”,
miminum a financial background
• Major Audit Committee roles include:
– Include mainly non-executive directors
– Enterprise’s Risk Management (ERM)
– Approve the appointment of the Auditors
– Establish the audit fees
– Critical accounting judgments

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 AUDIT AND AUDITOR
• Audit:
– Audit is an expert opinion on the fairness with which financial
statements present, in all material respects, a company’s financial
position, results of operations, and cash flows in conformity of GAAP

• Auditor:
– Auditor is a certified person/firm that performs the auditing activity
– The auditor does not have direct corporate governance responsibility
but rather provides a check on the information aspects of the
governance system
– Auditors’ primary role is to check whether the financial information
given to investors is reliable, thus contributing in decision making,
accountability, and monitoring of the system

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 INTERNAL AUDIT AND AUDITOR

• Internal auditing is an activity involved in advising organizations regarding

how to better achieve their objectives. Internal auditing involves the
utilization of a systematic methodology for analyzing business processes or
organizational problems and recommending solutions.

• Professionals called internal auditors are employed by organizations to

perform the internal auditing activity.

• The scope of internal auditing may involve internal control topics such as the
efficacy of operations, the reliability of financial reporting, investigating
fraud, safeguarding assets, and compliance with laws and regulations.

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 INTERNAL AUDITORS AND ENTERPRISR RISK
MANAGEMENT (ERM)

• Enterprise Risk Management (ERM) is one of the major activities of

Internal Auditing System
• According to the Institute of Internal Auditors:
– ERM “is a structured, consistent and continuous process across the whole
organization for identifying, assessing, deciding on responses to and reporting
on opportunities and threats that affect the achievements of its objectives.”
• ERM is a complex process requiring an appropriate corporate culture and
creativity stemmed of a variety of experiences
• It recognizes interdependencies among corporate, financial, and
environmental factors
• Strives to determine and implement an optimal strategy to achieve the
primary objectives i.e. optimize the value of the firm

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 INTERNAL AUDITORS AND ENTERPRISR RISK
MANAGEMENT (ERM)
• Key roles of Internal Auditing regarding ERM are:
• To provide independent and objective assurance for Board on
effectiveness of ERM
– Identify/assess/manage key risks
– Internal controls
• Assurance regarding, and evaluation of, the risk management
process
– Risk reporting, evaluation, management

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 EXTERNAL AUDIT AND AUDITOR

• The primary role of external auditing is to provide a judgment on whether

an entity’s financial statements are free of misstatements
• Where, this judgment or opinion is given by audit professionals, called
external auditors, who are independent of the entity being audited
• Users of the entities' financial information, such as investors, government
agencies, and the general public, rely on the external auditors’ reports
• The independence of external auditors is crucial to a correct and thorough
appraisal of an entity's financial controls and statements
• Any relationship between the external auditors and the entity must be
disclosed in the external auditor's reports

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 INTERNAL VS EXTERNAL AUDITORS

• Internal Auditors:
– Internal auditors’ primary responsibilities include appraising an entity's
risk management strategy and practices, management control
frameworks and governance processes, but they do not express an
opinion on the entity's financial statements
• External Auditors:
– The primary role of external auditors is to express an opinion on
whether an entity's financial statements are free of material
misstatements
– Moreover, they must also investigate any material issues raised by
inquiries from professional or regulatory authorities

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 What is…
Corporate Governance? JAYA

“Corporate Governance is the process and structure

used to direct and manage the business and affairs of
the company towards enhancing business prosperity
and corporate accountability with the ultimate
objective of realising long-term shareholder value,
whilst talking into account the interest of other
stakeholders.”

-Malaysian definition as per Finance Committee on Corporate Governance

(Report on Corporate Governance, February 1999)

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 “Good governance is not simply about
corporate excellence. It is the key to
economic and social transformation. The
corporation of today are no longer sheer
economic entities. These are engines of
economic and social transformation.”

-Dr Madhav Mehra

President of World Council For Corporate Governance

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 Malaysian Code on
Corporate Governance

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 Principles of Corporate Governance

Directors Directors’ Shareholders Accountability

Remuneration & Audit

•Level & Make Up of •Financial Reporting

•The Board
Remuneration
•Dialogue between •Internal Control
•Board Balance
•Procedure companies &
•Supply of investors •Relationships with
•Disclosure Auditors
Information
•Annual General
•Appointments to the Meeting
Board
•Re-election

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 Principles & Best Practices For CG

Shareholder Dialogue between Evaluation of External

Voting Companies & Corporate Auditors
Investors Governance

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Best Practices in Corporate Governance

The Board of
Directors

•Principal responsibilities of the Accountability & Audit

Board
•Constituting an effective board
•Size of non-executive participation Shareholders

•Board structures & procedures

•The audit committee
•Relationship of the board to
management •The relationship
between the board &
shareholders

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 CORPORATE GOVERNANCE PRACTICES

Role of the Board

- To focus on guidance and strategic oversight while management
run the company business
- Increasing shareholder value for the long term
- To ensure company is running effectively in accordance with the
boards basic fiduciary oversight requirement

The specifics of the board’s role will vary with size, stage and strategy of
the company and talents and personalities of the CEO and the board

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 Code of Ethics for Professional Accountants
(IFAC Code) AZMAN

• IFAC Code includes changes in three important aspects:

– The code establishes five fundamental principles of professional
ethics which all professional accountants must comply. Five
fundamental principles are a) Integrity, b) Objectivity, c) Professional
competence and due care, d) Confidentiality e) Professional
Behavior.
– The conceptual framework approach is now extended to all the
fundamental ethical principles. Professional accountants, whether in
public practice, in business or employment are required to apply the
conceptual framework approach to ethic.
– The revised code now has the authority of an international standard.
As an international benchmark, it requires that national ethical
standards developed by IFAC member body must be based on the
IFAC Code. They are not allowed to apply less stringent standards
than those stated in the IFAC Code unless certain rules are prohibited
by their local laws and regulations.

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 THE LEGAL ENVIRONMENT

1) Liability to clients-Breach of Contract

2) Liability to clients and third parties-Negligence
a) The auditor owed a duty of care to the plaintiff to confirm
to a required standard of care.
b) There is failure to act in accordance with that duty of care
c) There is a causal relationship or connection between
auditor’s negligence and the plaintiff damage
d) The plaintiff suffered actual loss or damage.

3) Duty to report breach of laws

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 AUDIT AND AUDITORS
Case References YATI

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 CORPORATE SCANDALS
• Infamous US cases: Enron, WorldCom, Tyco, etc.
• Malaysia : Transmile, Oilcorp, Megan Media, etc

Money laundering
Accounting Fraud Insider Trading

Asset Creative Accounting

Conspiracy
Misappropriation
Earnings management
Accounting
Asset Irregularities
Embezzlement Financial
Statement
Manipulation
Where are the auditors???
What are they doing??

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 CASES:MALAYSIAN CORPORATIONS

• Transmile Scandal, 2007

http://www.transmile.com/

• Transmile Air Services- cargo airline, premier express freight and

charter company
• Founded in 1993 , founder cum CEO: Gan Boon Aun
• Major shareholders:
Kuok Brothers Sdn Bhd 17.3%, Pos Malaysia & Services Holdings
Bhd 15.3%, Capital Group Intl 9.78%
• Chairman: Tun Dr Ling Liong Sik (former Transport Minister)
• Overstated earnings of FY 2006

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 CASES:MALAYSIAN CORPORATIONS

• Oilcorp Saga, 2008

http://oilcorp.com.my/
• Oilcorp Berhad – incorporated on 12 July 2001- listed on main board on 5 August 2003.
• An investment holding company, main activities: oil & gas, hotel & property, marine related activities, etc
• Issue: Oilcorp vs. BTMH (auditors):

Management of Oilcorp bid to remove BTMH and to replace with Horwarth (May 2007 ~)

OILCORP

BTMH HORWARTH

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 FUTURE OF AUDIT JOE

• The objective and techniques of auditors have changed

during the four hundred years of recognizable existence
of auditors

• The lack of understanding of the auditors’ role among

the public may have harmful implications to the audit
profession as the public may not be able to recognize
the contribution of auditors to society.

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 FUTURE OF AUDIT

• Fall of Enron-The Sarbanes-Oxley Act was

implemented.
• The Public Company Accounting Oversight
Board
• The collapse of HIH Insurance-Ramsay Report
• Practice Review Programme and Public
Oversight Board (PCAOB) (Malaysia)

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 THE ROLE OF AUDITORS IN THE FUTURE

• Audit has gone from the backwater from an inspection

focused, box-ticking environment and is now on a
massive journey to meet new challenges.
• Auditor needs to focus on how they can take audit
function forward and add value to the business.
• Auditor needs to consider what their function should look
like, alongside the regulatory agenda, and how they can
influence that agenda.
• Auditor can’t afford to become the old inspection groups
of 20 years ago. They need to hire from a pool that can
do analysis.

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 SUMMARY AND CONCLUSION

• Good corporate governance is not simply about the avoidance

of financial shocks nor should the emphasis be on the negative
impact of poor corporate governance.
• Good corporate governance is not simply about fairness in the
allocation of a limited pie but rather about the enlargement of
that pie, the adoption of solid and correct business strategies,
and the effective management of the firm.

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 • “An auditor can improve and analyze the books, but in
the end, the key is for management to practice good
governance”. The Edge Malaysia, 4 February 2008

THANK YOU

CSGB6102 ETHICS AND CORPORATE GOVERNANCE

20TH OCTOBER 2008