B: corporate governance, controls and corporate social responsibility Flashcards
1
Q
Corporate governance
Defns: B&H, FRC
A
Buchanan and Huczynski definition “organisations of social arrangements for the controlled purpose of collective goals“
Collective goals
Multiple people
Systems and procedures
FRC “ facilitate effective entrepreneurial and prudent management that can deliver the long-term success of the company”
System by which companies are directed and controlled
2
Q
Profit oriented
1st, 2nd objectives and examples
A
Primary objective: maximise wealth
Secondary objective: detailed objectives as to how to maximise on the wealth
Examples: sole traders, partnerships, Limited liability companies, Ltd, plcs
3
Q
Not for profit oriented
1st, 2nd objectives and examples
A
Primary objective: maximise benefit to beneficiaries
Secondary objectives:
-economy (controlling costs)
-efficiency (achieving objectives at minimum cost)
-effectiveness (a measure of achievement by reference to objectives)
Seek to satisfy needs of customers
Examples: HMRC, schools, hospitals, charities
4
Q
Public sector organisations
objective and examples
A
Concerned with providing basic government services and controlled by government organisations
5
Q
Private sector organisations
objective and examples
A
Run by private individuals and groups rather than government
Examples: businesses, NGOs, charities, clubs
6
Q
NGOs
objective and examples
A
Non-governmental organisations who often promote political social and environmental change and are not directly linked to the government
Red Cross, green peace
7
Q
Cooperatives/mutuals
A
Organisations owned and democratically controlled by their members – the people who buy their goods and services
8
Q
Development of corporate governance
A
Due to a series of large corporate failures between the 1980s and early 1990s:
Poorly run companies
Paul financial reporting
Lack of interest from major investment institutions
9
Q
Maxwell communications corporation
A
UK media conglomerate
Empire comprised of 400 companies floating each other
Stole from pension funds and declared bankruptcy
Issues include dominant CEO, and effective board, excessive borrowing
Bailed out by banks
10
Q
Enron
A
2001 US energy trader
Leadership for regulators: off-balance-sheet transactions
Chief stole from company and deceived financial position
Overdependence on auditor: familiarity
SOX 2002 introduced to increased transparency, reporting standards
Lead to global code of corporate governance
11
Q
WorldCom
A
US telecoms
Reporting practices: claimed expenses as capital expenditure, personal loans by chiefs, but accounting practices, inflated profits
Filed for bankruptcy in 2002
Lead to accounting reform SOX 2002
12
Q
Agency theory
A
Nature of agency relationship deriving from separating ownership and control
Problem due to the difference in objectives: max prof in SR vs max wealth in LR
Principal = shareholder
Agent = director
13
Q
Stewardship
A
Responsibilities/accountability
14
Q
Fiduciary relationship
A
Relationship of good faith where someone makes decisions on behalf of another is best interest
15
Q
Resource dependency theory
A
External resources affect behaviour of organisations
Organisations depend on each other to manage resources
16
Q
What does the OECD stand for and to all its constituents?
A
Capital O organisation for economic co-operation and development
34 countries and eight non-members who want a free market economy with one set of rules for a corp gov
17
Q
Name the six principles of OECD corporate governance
A
- Effective corporate governance framework
- Shareholders rights of ownership
- Fair treatment for shareholders
- Stakeholders roles and rights
- Disclosure and transparency
- Responsibilities of the board
Even Snakes Fear Snakes Dont Run
18
Q
Who published the IFAC’s main drivers of sustainable corporate success?
A
The professional accountants and business (PAIB) Committee to support the global accountancy profession in responding to changing expectations
19
Q
What are the eight drivers of sustainable organisational success?
A
Customer and stakeholder focus Effective leadership and strategy Integrated governance, risk and control Innovation and adaptability Financial management People and talent management Operational excellence Effective and transparent communication
20
Q
Which group is Cima a contributor to?
A
The report leadership group which is a multi stakeholder group that aims to challenge establish thinking of corporate reporting
21
Q
What is the aim of the report leadership proposals for better corporate governance?
A
The aim is better rather than more disclosure and disclosure that is adapted to the circumstances of the company
22
Q
What are the five proposals of the report leadership proposals?
A
Tongue from the top
How the board works as a team
The key actions of the board and its committees
For effectiveness
Communication and engagement with shareholders
23
Q
Two-tier boards – which countries? – For what reasons? – Structure? – Responsibilities?
A
– France and Germany
– codetermination and relationships with banks
– management board and supervisory board (lower and upper tier)
-Lower runs day today, Upper is for oversight an appointment
24
Q
Unitary boards – which countries? – For what reasons? – Structure? – Responsibilities?
A
– UK
– single board of executive director & non-executive directors as a mix
25
Which report says:
the chairman see our role should be split
there should be good communication understanding between audit and accountability,
and institutional investors need for greater dialogue that formed part of the London stock exchange listing rules “comply or explain”?
Cadbury (1992)
26
Which report related to directors remuneration (reporting the balance between salary and performance)?
Greenbury (1995)
27
Which report deals with criticism of Premier at previous reports and was consolidated into combined code?
Hampel (1998)
28
Which report lead to the framework of establishing systems of internal control?
Turnbull (1999)
29
Which report focused on the role of non-executive directors?
Higgs (2003)
30
Which report focuses on the recruitment and development of NED’s?
Tyson (2003)
31
Which report focuses on the relationship between auditors and the audit committee?
Smith (2003)
32
Which report lead to the review of corporate governance following the financial crisis in 2008 and what did this review lead to?
Sir David Walker and the FRC (2010)
| Code was renamed UK corporate governance code
33
Who is the UK corporate governance code for?
It is for listed UK companies and addresses issues of best practice
34
What are the main principles of the UK corporate governance code?
Board leadership and company purpose
Remuneration
Audit, risk and internal control including audit committees
Composition succession and evaluation of board
Division of responsibilities
BRACD
35
Which corporate failures led to the development of SOX and which year did this take place?
Enron and WorldCom 2002
36
Who has to follow the SOX approach?
All listed companies in the US who must provide an SEC vouching for the financial statements signed by the CEO and CFO
37
What are the six key points of SOX?
AIAAIAR
```
Audit committee
Internal control report
Accuracy of financial statements
Auditor independence
Increase financial disclosures
Audit partner
Restrictions on dealings
```
38
Who introduced the King Report III and when was it published?
The Institute of Directors in Southern Africa (IoDSA)
I in 1994
II in 2002
III in 2009
39
Who does the King III report apply to?
All SA entities
Principles drafted on the basis
40
What should be used in accordance with the King report?
The code of governance principles should be used in conjunction with the report
41
What are the nine sections of the King code?
```
Ethical leadership and corporate citizenship
Board and directors
Audit committees
The governance of risk
The governance of information technology
Compliance with laws rules codes and standards
Internal audit
Governing stakeholder relationships
Integrated reporting and disclosure
```
42
What framework does King III use?
The ‘apply or explain’ governance framework
43
Name two Codes for public services?
The code of governance for the voluntary and community sector the good governance standard for public services
44
What is the composure of the board committees?
Remuneration: 100% non-executives
Audit: 100% non-executive
Nominations: majority non-executives
45
How often should the audit committee meet?
At least three times a year and also at least once a year without the presence of any executive directors
46
What experience with the audit committee have?
At least one of the non-executive directors should have relevant financial experience
the non-executive directors should have formal terms of reference
47
What is the overall responsibility of the audit committee and what do these typically include?
Overall: controls, internal audit and external audit
Responsibilities:
– review financial statements
-Review internal financial controls
-Discussed significant matters with auditors
-Review internal audit program
-Recommendations on appointment and move of auditors
-Review of audit report and any management letter
-Ensure the system is in place for whistleblowing
48
What is the nomination committees procedure for appointing new directors to the board?
– Creation of the nominations committee
– chairmanship chair except when considering successor
– evaluation of Canada skills and knowledge
– Germans other commitments should be noted in the report
-Executive should not be members of any other FTSE 100 company boards
-A separate section of the annual report to describe the work of the committee
49
Responsibilities of the nominations committee?
– Review structure size and composition of the board
- Consider balance between execs and non-execs
- Appropriate management of diversity
- Reduced domination in board
- Evaluate skills of directors
- Plan succession and removal of directors
- Independently on board
50
Role of Remuneration committee?
Have an appropriate word policy that attracts routines and motivates directors
51
Responsibilities of the remuneration committee?
– Review teas and sees of employment of board
– recommend and wanted to level the structure of remuneration
– establish pension provision
– set detailed remuneration
– ensure fair awards
– sold to shareholders that remuneration involves no personal interest
– agreed compensation for loss of office
52
Effect of corporate governance on directors powers?
Non-executive scrutinising decisions
Avoid domineering CEO
Benefit shareholders and stakeholders
53
What are the three parties of an assurance engagement and how do they relate to each other?
Practitioner E.g. auditor
Intended user.
Responsible party. E.g director
Practitioner expresses a conclusion to enhance the degree of confidence the intended use of the responsibility party have about the outcome of the evaluation of the subject matter against criteria
54
Objective of external audit engagement?
Enable the auditor to express an opinion on whether the financial statements:
– a fair and true
– are in accordance of financial reporting framework
55
Objective of an auditor?
– Obtain reasonable assurance and free from material misstatement
– in accordance with financial reporting framework
– report and financial statements in order to findings
56
What are the five elements of an external audit engagement?
1. 3 parties involved
2. the subject matter:The financial statements
3. sufficiency and appropriateness
4. financial reporting framework
5. the audit report
57
What is the expectation gap?
Misconception that the audit opinion is a guarantee that the financial statements are correct i.e. provides absolute assurance
58
Limitations of an audit?
FIRED
– financial statements include estimates
– internal controls have limitations
– representations from management only source of evidence
– evidence is after persuasive not conclusive
– do not test everything: sample based testing
59
What is the materiality convention?
When they sell examples based on where the greatest risk of a material misstatement lies
60
What are the two broad forms of testing?
Controls testing: reliability of accounting systems and controls
Substantive testing: more detailed testing if controls are not satisfactory
61
What is audit risk? How is it calculated? How can it be minimised?
The risk that the auditor comes to the incorrect opinion
AR = CR x IR x DR
Can only control DR
62
What is inherent risk? Is it high or low?
The susceptibility of a material misstatement irrespective of internal controls
– usually quite high
63
What is control risk? Is it usually quite high or low?
The risk that a material misstatement would not be prevented detected or corrected by the accounting internal control systems
– quite high
64
How can detection risk be decreased?
Sufficiency: quantity of evidence
Appropriateness: quality of evidence (relevance and reliability)
65
How do you ensure appropriateness of evidence?
Reliability: trustworthy and dependable source
Relevance: completeness i.e. inventory to inventory records and existence i.e. inventory records to inventory
66
What is an engagement letter?
It specifies the nature of the contract between the audit firm
Purpose:
– minimise the risk of any misunderstanding
– confirm acceptance of engagement
– set of terms and conditions are engagement
Sent before it commences
Reviewed every year
Issued by auditor
67
what is an audit strategy?
Overall approach: sets scope timing and direction of audit
| How to use resources is determined here
68
What is the audit plan?
operational details: It is the next stage of the audit strategy i.e. a specific detailed plan
69
What is a management letter? What does it include?
Any deficiencies and internal control identified as a byproduct of the audit at the end of the audit
Includes:
Covering letter
Appendix showing deficiencies implications and recommendations for improvement
70
What is a written representation letter?
Written statement by management provided to auditor to support audit evidence
Appropriate when more reliable forms of evidence is not available
– estimations
– aspects of law and regulations
– Date should match when financial statements are authorised
– signed by CEO and CFO
71
What is an unmodified opinion on the audit report?
When the auditor concludes that the financial statements are prepared in accordance with applicable financial reporting framework
72
What is an on modified report?
When there are no other matters the auditor wishes to draw attention to
73
Definition of modified without modifying the opinion?
True and fair view
| But something to be brought to the attention of user by way of paragraph
74
Definition of modified with a modified opinion?
Doesn’t show fully show true and fair view
OR
Not obtain sufficient appropriate evidence to make a conclusion
75
Who publish the audit firm governance code? who does it apply to?
The FRC and Institute of chartered accountants in England and Wales in 2010
The Working group recommended the code is applicable to firms that order more than 20 listed companies
7 Audit firms that together audit about 95% of the companies listed on the LSE
76
Contents of an modified audit report?
1. title and addressee
2. introduction paragraph
3. management responsibilities
4. auditors responsibilities
5. opinion
6. other reporting responsibilities
7. signature accommodate and address
77
Contents of the audit firm governance code?
20 principles split into five sections
```
Leadership
Values
Independent
Operations
Reporting
Dialogue
```
DORVIL
78
Who controls the internal audit?
The chief internal auditor who reports to the audit committee
79
Roles of internal audit department?
Examine financial and operating information
Special investigations
Reviewing compliance and regulations
Reviewing the EEE of operations
Assisting identification of risk
Reviewing accounting and internal controls
80
What is an operational audit?
Also called the value for money audit
Economical: cost effective
Efficient:min input for max output
Effective: meets objs
81
What is a financial audit?
Examining records and evidence of analysing information
82
What is project auditing?
Best value and IT assignments are about looking at the processes within the organisation
83
What is the social and environmental audit?
Contribution to safeguarding environment
| Contribution to society
84
What is the management audit?
Appraisal of effectiveness of managers and corporate structures
85
What structure does the internal audit report have?
No formal reporting structure: format agreed with audit committee or board of directors prior to assignment as they are only for internal use
86
What is an error of omission? Does it affect financial accounts?
Where transaction has been completely omitted from the ledger account
87
What is an error of commission? What does it affect?
one side of the transaction has been entered in the wrong account
Does not affect the calculation of profit
Does not affect position of SOFP
88
What is an error of principle? What does it affect?
Correct and incorrect amounts are of different types
Affects calculation of profit
Affects position shown by statement of financial position
89
How to prevent errors?
```
Authorisation procedures
Documentation:Audit trail
Organisation of staff: segregation of duties
Safeguarding assets
Detecting errors
Spot checks: teaming and lading
```
90
What is fraud?
Theft by deception
Deliberate to obtain unjust/ illegal advantage
91
When is a pyramid scheme legal?
If the primary purpose is to sign up new distributors rather than sell product as eventually there is a limit to the new sign ons
92
How to prevent fraud?
Anti-fraud culture
Risk awareness
Whistleblowing
Son internal control system
93
What is Friedmans opinion on CSR?
– Only humans have more responsibility for the action
– managers duty is to shareholders
– social issues are the governments problem
94
What is the enlightened self interest theory?
– Corporations that the Gleason are awarded with extra customers
-Non-ethical corporations are boycotted
– employees want to work for ethical corporations
– less legislation when ethical
– longer term investment
95
What is the WBCSD’s definition of CSR?
The continuous commitment by businesses to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large
96
What is Ghana’s perception of CSR?
Capacity building for sustainable livelihoods
| – respect cultural differences and find business opportunities
97
What is the Philippines perception on CSR?
Giving back to society
98
Rank Carroll’s 4 part model?
1. ethical
2. legal
3. economic
4. philanthropic
First three are required, P is desired
99
What are the three Ps?
Products
People
Places
100
What are Carroll’s 4 strategies for social responsiveness? Rank them from active to non-active
PADR
Proaction: Seek to go beyond norms
Accomadation: Accept responsibility and do what is demanded
Defence: Admit responsibility but fight it
Reaction: deny any responsibility
101
Outlining five steps CSR strategy?
1. identify stakeholders
2. classify stakeholders
3. establish stakeholders claims
4. assess importance of stakeholders
5. decide upon response to social pressure (carrolls strategies)
102
How can maximise in the world of business owners be socially responsible?
– Increase returns equals increased tax payments
| – shares owned by pension funds
103
What is the sustainability?
Using resources in a way that doesn’t compromise future generations
104
How does sustainability impact operations management?
– Process design
– product design
– quality management
105
Supply chain management practices?
– Purchasing
– supply selection
– location
106
What is the global reporting initiative?
International independent organisation that helps businesses government and other organisations understand and communicate the impact of business on critical sustainability issues
Division: to create a future where sustainability is integral to every organisations decision making process
107
What are the G4 sustainability reporting guidelines? What do they provide?
– Reporting principles
– standard disclosures
– implementation manual
Sustainability reports by organisations regardless of size, sector or location
108
Principles for defining report quality? (G4)
```
Balance
Reliability
Accuracy
Clarity
Compatibility
Timeliness
```
BRACCT
109
What is an internal stakeholder? Give some examples
Stakeholders that are intimately connected to the organisation and have a strong influence on how they have run
Employees/managers/directors
110
What is it connected stakeholders? Examples
Connected stakeholders invest in or have dealings with the farm
Shareholders/customers/suppliers/finance providers
111
What is an external stakeholder? Examples
They do not have a direct link to the organisation but can influence
Community/pressure group/government/trade unions
112
Which CSR initiative states that every individual and organ of society has the responsibility to strive To promote respect for these rights and freedoms
The universal declaration of human rights
113
Which initiative establish norms covering all aspects of working conditions and industrial relations
The I LO conventions
114
Which declaration sets of 27 principles defining the rights and responsibilities of states in relation to human development and well-being and provides guidance for government business and individuals and how to contribute efforts to make development socially economically and environmentally sustainable?
The 1992 Rio declaration
115
Which declaration states that the private sector has a duty to contribute to the evolution of equitable and sustainable communities and societies?
The Johannesburg declaration on sustainable development 2002
116
Which initiative reiterated the importance of respect for existing labour human rights and environmental commitments
2005 world Summit outcome
117
Which convention sought to criminalise group practices, develop national institutions to prevent corruption, cooperate with governments to recover stolen assets and help each other fight corruption?
The 2003 UN Convention against corruption
118
What are the four main sections of the UN global impact initiative?
Human rights
Labour standards
Environment
Anticorruption
119
What was the time in context when the OECD guidelines for multinational enterprises were adopted?
1976
| Going concern about the negative impact of corporate practices particularly on developing countries
120
What are the OECD guidelines? Who do they apply to?
Non-binding recommendations addressing governments operating in adhering countries: 30 OECD participate in countries and 9 nonmember countries
121
What are the general policies of the OECD guidelines?
Prices should:
1: contribute to economic, environmental and social progress
2. respect the internationally recognised human rights
3. encouraged local capacity
4. encourage human capital formation
5. refrain from legislative exemptions
6. support good corporate governance principles
7. develop self regulation procedures
8. promote awareness of compliance
9. refrain from discrimination
10. carry out risk assessment
11. avoid adverse impacts
12. medicate adverse impacts
13. proactive an adverse impact
14. engage with stakeholders
15. abstain from improper involvement
