Changing the way you learn

Corporate Governance

Aim is to improve the ways in which companies are run and to enhance their corporate reporting
1. Cadbury (1992): corporate governance is the system by which companies are directed and controlled
2. Solomon (2007): the system of checks and balances both internal and external to companies which ensure: companies discharge their accountability to all stakeholders and act in a socially responsible way in all areas
3. Objectives : Transparency, rule of law, participation, responsiveness, equity, efficiency & effectiveness, sustainability, accountability
Why was corporate governance introduced for listed companies
1. Problems
  1. Lack of internal control at the highest levels, not relevant to lower level employees, just as relevant at highest levels
  2. lack of checks and balances on the individual authority of directors
  3. intimidation threats - compromises independence and ability to report objectively
2. Cadbury Committee Report (1992) proposals for best corporate practice in order to:
  1. reinforce responsibilities of executive directors
  2. strengthen the role of non executive directors
  3. make the case for audit committees
  4. restate the principle responsibilities of auditors
  5. reinforce the links between shareholders, boards and auditors
Corporate governance code requirements
1. executive directors run the company day to day
2. independent non executive directors provide objective oversight of executive directors, entity operations and board decisions
3. separation of the role of CEO and chairperson to divide power and authority
4. no one person to have complete control over decisions
5. open discussion of critical matters by all directors
6. sufficient NEDs to ensure no one individual/group is dominating decsions
7. NEDs free of business or other relationships which could materially interfere with the exercise of independent judgement
8. Internal controls
  1. directors required to conduct annual review of the effectiveness
  2. Internal audit mandatory for all listed and public listed companies
9. Audit Committee
  1. at least 3 (2 for small co) non executive directors, independent of management
  2. members who have a wide range of business and professional skills
  3. members with good understanding of the business but not from direct management
  4. clear written terms of reference setting out its authority and its duties
  5. members prepared to devote significant time and effort to the committee
  6. at least one member competent in accounting and/or audit
Audit committee
1. Financial & internal control functions
  1. what do they do?
    1. identify matters needing action or improvement and recommend action to the board
    2. monitor & review internal audit function and findings
    3. appoint head of internal audit department
    4. review internal financial controls and internal control risk and management systems
    5. review significant financial reporting judgements - interim & annual
    6. monitor integrity of formal announcements relating to financial performance
    7. monitor integrity of annual & interim financial statements
  2. Key Objectives
    1. increase public confidence in credibility & objectivity of financial info
    2. assist directors in carrying out of financial reporting duties
    3. assist directors in ensuring FS show a T&F view
    4. improve internal management accoutning reports
    5. maintain the independence of internal audit function by providing objective oversight of the financial reporting and other functions
2. External Auditors
  1. What do they do?
    1. review & monitor external auditors independence and objectivity
    2. review & monitor the effectiveness of the external auditor in undertaking non audit services
    3. review communications from external auditors on internal control weaknesses - make recommendations needed to strengthen
    4. develop & implement policy on engaging external auditor in undertaking non audit services
    5. make recommendations to the board on the appointment, reappointment or removal of the external auditor
    6. approve remuneration and terms of engagement of external auditor
    7. hold discussions with external auditor regularly without executive directors
    8. review & monitor compliance with company's code of conduct
    9. review & monitor compliance with legal & regulatory reuirements
  2. Key objectives
    1. increase public confidence in the independence and objectivity of external auditors
    2. provide an unbiased audience for external auditors to report problems & concerns
    3. provide external auditors with an ally on the board
    4. act as a buffer between external auditors and executive directors to reduce directors influence on auditors and their appointment - reducing intimidation threats
    5. enable auditors to carry out work without limitations
    6. assist auditors in stamping out aggressive earnings management in the preparation of FS - to show a T&F view and increasing confidence in the credibility & integrity of FS

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Corporate Governance

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	Created by Sara Sefton over 10 years ago